COMMISSION STAFF WORKING DOCUMENT Country Report Belgium 2015 Including an In-Depth Review on the prevention and correction of macroeconomic imbalances  {COM(2015) 85 final}   This document is a European Commission staff working document . It does not constitute the official position of the Commission, nor does it prejudge any such position.
Date: 2015-02-26
Institutions: European Commission
Subjects: Belgium, economic consequence, economic growth, economic indicator, economic reform, employment statistics, loss, macroeconomics, structural adjustment













EUR-Lex - 52015SC0021R(01) - EN











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52015SC0021R(01)

COMMISSION STAFF WORKING DOCUMENT Country Report Belgium 2015 Including an In-Depth Review on the prevention and correction of macroeconomic imbalances  {COM(2015) 85 final}   This document is a European Commission staff working document . It does not constitute the official position of the Commission, nor does it prejudge any such position. /* SWD/2015/0021 final/2 */









Executive summary  1
1.       Scene
setter: economic situation and outlook  1
2.       Imbalances,
risks and adjustment 7
2.1.   Cost
competitiveness 8
2.2.   Non-cost
competitiveness 18
2.3.   Public
indebtedness 26
2.4.   Household
indebtedness and the housing market 33
3.       Other
structural issues 43
3.1.   Labour market
and education  44
3.2.   Taxation and
fiscal framework  53
3.3.   Service and
product markets 59
3.4.   Greening the
economy  63
AA.   Overview
Table  65
AB.   Standard
Tables 76
LIST OF Tables
1.1.     Macroeconomic Imbalance
Procedure: scoreboard   5
2.1.1.  Share of total final gas
consumption  15
2.1.2.  Share of total final
electricity consumption  15
2.2.1.  Manufacturing exports by type
(%) 19
2.4.1.  Financial burden indicators —
median ratios (in %) 38
3.1.1.  Tax wedge  45
AB.1.  Macroeconomic indicators 76
AB.2.  Financial market indicators 77
AB.3.  Taxation indicators 78
AB.4.  Labour market and social
indicators 79
AB.5.  Expenditure on social
protection benefits (% of GDP) 80
AB.6.  Product market performance and
policy indicators 81
AB.7.  Green growth  82
LIST OF Graphs
1.1.     Real GDP growth and
contributions 1
1.2.     Inflation (y/y %change) 1
1.3.     Labour market indicators 2
1.4.     Current account balance
(%GDP) 3
1.5.     Export market shares:
evolution and breakdown  3
1.6.     Net international investment
position (NIIP, %GDP) 3
1.7.     Net lending/borrowing by
sector (%GDP) 4
2.1.1.  Real effective exchange rate
(100 = EA18 2005) 8
2.1.2.  Hourly labour cost evolution in
the business sector 8
2.1.3.  Hourly labour cost levels
(2013; EUR) 9
2.1.4.  Development of unit labour
costs (2000 = 100, total economy) 10
2.1.5.  Productivity and wage evolution
(2009 = 100) 11
2.1.6.  HICP (annual % change) 13
2.1.7.  Total electricity prices for base
load profile of 500 GWh  16
2.1.8.  Breakdown of gross manufactured
exports by value added (% of total, 2009) 16
2.1.9.  Forward linkages and
productivity growth of the Belgian service sectors 17
2.2.1.  Breakdown of potential growth  18
2.2.2.  Global value chain
participation index (%) 19
2.2.3.  Quality rank of export products 20
2.2.4.  R&D intensity (%GDP) 21
2.2.5.  Rate of company start-ups (%,
avg 2008-12) 23
2.3.1.  Public debt (% of GDP) -
Comparison between 2014 and 2015 vintage of the EC winter forecast 26
2.3.2.  Contributions to the change in
the gross debt ratio (pps. of GDP) 26
2.3.3.  Interest expenditure and
implicit interest rate  27
2.3.4.  Maturing debt of central
government (% of total outstanding central government debt) 27
2.3.5.  Recent evolution of annual
yields on Belgian debt instruments (%) 28
2.3.6.  Spread of selected government
bonds vis-à-vis German bunds 28
2.3.7.  Share of Belgian bonds in total
euro area bond holdings by Belgian banks (%) 29
2.3.8.  Projections of gross debt (% of
GDP) 29
2.3.9.  Consolidated gross debt –
breakdown between government subsectors (% of GDP) 30
2.3.10.          Net financial
assets/liabilities by sector (ESA2010) 31
2.3.11.          Debt of non-financial
corporations (% of GDP): BE versus EA, ESA95 versus ESA2010  31
2.4.1.  Evolution of house price index
and loans for house purchase  33
2.4.2.  Real house price index —
selected countries 33
2.4.3.  Price responsiveness of housing
supply  34
2.4.4.  Developments in the average
amount of new mortgage loans and aggregate loan-to-value ratio (in EUR 1 000) 35
2.4.5.  Household debt 36
2.4.6.  Non-performing loans 36
2.4.7.  Household debt indicators 37
2.4.8.  Percentage of households
holding debt by income  38
2.4.9.  Price-to-rent and price-to-income
ratio  39
2.4.10.          Increase in rentals and
% of tenants 40
2.4.11.          Overvaluation gap with
respect to main supply and demand fundamentals 40
2.4.12.          Credit constraints
(2010) 41
2.4.13.          Average price/m² of a
120 m² apartment located
in the capital (in EUR, end 2012) 41
2.4.14.          Demographic evolution
per age cohort 2000-2060 (thousands of people) 42
3.1.1.  Employment and activity rate
(%, 20-64y) 44
3.1.2.  Regional employment and
unemployment rates (%, total labour population) 44
3.1.3.  Unemployment trap (when taking
up work at previous wage level, 2013) 46
3.2.1.  Decomposition of the implicit
tax rate on labour (2012) 53
3.2.2.  Decomposition of the implicit
tax rate on consumption (2012) 53
3.2.3.  Environmental taxation (2012, %
of GDP) 55
3.3.1.  'Churn' rate: professional,
scientific and technical activities (avg 2008-11) 59
3.3.2.  'Churn' rate: retail (average
2008-11) 60
3.3.3.  Electricity prices for
residential consumers (all taxes and levies included) 62
3.4.1.  Remaining gap to 2020 reduction
target for non-ETS greenhouse gas emissions 63
LIST OF Boxes
1.1.     Economic surveillance
process 5
2.1.1.  Performance of manufacturing
activities 12
2.2.1.  Adequacy of public
infrastructure  24
3.1.1.  Net increase in disposable
income when entering into work  47
3.3.1.  Security of energy supply  61
LIST OF Maps
No table of contents
entries found.
The Belgian economy strengthened in 2014
though years of stagnating activity have left their mark. Belgium has entered a slow-moving recovery with GDP growth expected
to accelerate from 1% in 2014 to 1.4% in 2016 thanks to company investments and
external trade. The unemployment rate is projected to decrease from a ten-year
high of 8.5% last year to 8.1% in 2016 as job creation in the private sector
picks up. The rising trend of public debt is expected to be halted with debt
stabilising at around 107% of GDP in 2016, but debt reduction is hampered by
low growth and inflation. The latter has fallen back to around zero and is
forecast to increase gradually from the second half of 2015.
This Country Report assesses the Belgian
economy against the background of the Commission's Annual Growth Survey. The latter recommends three main pillars for the EU's economic and
social policy in 2015: investment, structural reforms, and fiscal
responsibility. In line with the Investment Plan for Europe, it also explores
ways to maximise the impact of public resources and unlock private investment.
Finally, it assesses Belgium in the light of the findings of the 2015 Alert
Mechanism Report, in which the Commission found it useful to further examine
the persistence of imbalances or their unwinding. The main findings of the
In-Depth Review contained in this Country Report are as
follows: 
·       While the loss of external competitiveness incurred continues to
pose macroeconomic risks for the Belgian economy, the magni­tude of these risks
has decreased. Regarding cost parameters,
corrective measures have started narrowing the labour cost gap. Closing it
entirely will require additional action and preventing new gaps from emerging
hinges on reforms of the wage bargaining system. Energy input costs are found
to saddle large industrial users with a competitive disadvantage as well. Scope
for improving the non-cost dimension of external competitiveness is
considerable, with Belgium not performing particularly strongly with respect to
innovation output.
·       Public debt remains high but several factors temper associated
macroeconomic risks. On the one hand, vulnerability
stems from the reduced room to absorb future shocks. Sizeable, though
decreasing, contingent liabili­ties related to financial sector guarantees and
high domestic debt ownership imply important feedback loops. On the other hand,
medium-term sustainability risks appear more manage­able given low financing
costs, the resumption of primary surpluses and the relati­vely long average
maturity of the debt stock. The strong financial position of Belgian house­holds
is a particularly important factor. Despite the high public debt, the Belgian
economy continues to enjoy a very positive net asset position so that, overall,
short to medium term risks are contained. This is also in line with the track
record in the recent and more distant past.
·       Macroeconomic risks stemming from the interplay between household
debt, the financial sector and a potential correction of housing prices are
found to be moderate and expected to be manageable.
Robust household balance sheets, high ownership rates, housing shortages,
reasonable affordabil­ity, and demo­graphic projections are likely to prevent
an abrupt housing price decline. The impact on banks of potential downward
price adjustments or adverse income shocks should be limited thanks to sound
lending standards.
The country report also analyses other
macro­economic and structural issues and the main findings are as follows:
·       Structural problems characterising the Belgian labour market result
in a chronic underutilisation of labour with a low aggre­gate employment rate. Shortcomings are related to labour taxation and financial disin­centives,
educational outcomes and qualifica­tion mismatches, the wage-setting system,
labour shortages, and old-age social security systems. Both young and elderly
workers face important barriers to entry. People from migrant back­grounds are
in a particularly precarious position.
·       The Belgian tax system is characterised by a high overall burden and
by relatively high rates and narrow tax bases. The tax
burden is heavily skewed towards labour. This results in high labour costs,
which discourage job crea­tion, and large tax wedges, which contribute to
remaining unemployment traps. Certain features of the tax system are
environmentally harmful. 
·       Competition in several key service sectors remains low. This affects the wider economy given that they supply important
inputs. Furthermore, the precarious security of energy supply might persist as
a result of inadequate domestic generation capa­city, the nuclear phase-out, a
rising proportion of intermittent power and the low spare import capacity.
There appears to be ample scope to improve public infra­structure through
higher investments.
In a letter sent to the Commission in
November 2014, the Belgian authorities committed to a number of structural
reforms implementing the country-specific recommendations issued by the Council
in July 2014. These structural reforms were further
specified in two reports sent on 30 January 2015 and 13 February 2015.
Overall, Belgium has made some progress
in addressing the 2014 country-specific recom­mendations. Substantial progress was made in the area of pension reforms, with
measures taken to narrow the gap between the effective and the statutory
retirement age, as well as the intention to increase the latter in the longer
term. Some progress was made towards restoring competitive­ness with corrective
measures adopted to narrow the relative labour cost gap and first steps taken
to reform the wage-setting system. Some progress was made on the employment
challenges with policy responses the least developed with respect to increasing
labour market access and participa­tion for disadvantaged groups. At the same
time, limited progress has been made towards a comprehensive tax reform entailing
in particular a clear shift from labour towards less growth-distorting tax
bases. There has also been limited progress on the functioning of retail
markets and deregulation of professional ser­vices. On the recommendation to
ensure that greenhouse gas reduction targets are met, progress is considered
limited in the absence of an inter­governmental agreement on the distribution
of efforts and auctioning revenues. Finally, progress to align the contribution
of transport with the objective of reducing road congestion was limited.
The Country Report reveals policy
challenges stemming from the analysis. 
·       Sustained consolidation efforts would be instrumental in reducing
risks resulting from public indebtedness. To offset
the budge­tary impact of an ageing population, a success­ful consolidation
strategy depends on the swift implementation of planned pension reforms, as
well as other reforms to lift economic growth.
·       Pursuing tax reforms aimed among other things at rebalancing the tax
system towards non-labour tax bases would promote the further unwinding of the
competitiveness imbalance. Tax bases with scope for
broadening include, among others, envi­ronmental and consumption taxes, certain
types of financial income, and recurrent property taxation. In addition,
efforts to make wage formation more responsive to the business cycle and
productivity evolutions would ease the impact on job creation.
·       A stronger perfor­mance on innovation and R&D valorisation could
improve the non-cost dimension of competitiveness.
The same holds for reducing red tape and administrative barriers, and tackling
rigidities affecting product, service and the labour market. This would also
strengthen the investment climate.
·       Efforts to lift employment would be helped by preventing early school
leaving and a reduction of inequalities of education­al outcomes. In view of the low labour market participation of the young and
people with a migrant background, the timely provision of customised activation
trajectories remains crucial. Policies to promote active ageing and increase
demand for elderly labour would assist measures to reduce early exit possibili­ties.

·       Eliminating infrastructure bottle­necks and improving the quality
and adequacy of the capital stock would strengthen overall eco­nomic
performance. Particular attention could be paid to
transport and to preventing disruptions to the energy supply by enhancing grid
intercon­nectivity and domestic generation capacity.
Economic growth: recovering but unable to
reconnect with pre-crisis levels
The Belgian economy took a turn for the
better in 2014 though several years of stagnating activity have left their
mark. Growth reached 1% in 2014 on the back of
company investments and net external trade. Despite several favourable factors,
such as energy price dynamics and external demand, growth is projected to
accelerate only moderately, reaching 1.1% in 2015 and 1.4% in 2016. Belgium has
entered what appears to be a slow-moving recovery with growth considerably
below pre-crisis levels. The same applies to the potential growth rate, with
the structural growth capacity of the Belgian economy seemingly impacted by the
recent crisis. Contributions from productivity, in particular, have faltered,
highlighting the impact of certain structural bottlenecks discussed later in
this document.
 Graph 1.1:     Real GDP growth and contributions 
 Source: European Commission 
Belgian companies are expected to
contribute significantly to overall growth in 2016.
This reflects mainly the initial effects of measures to restore cost
competitiveness discussed in section 2.1. Their effect should be compounded by
the further easing of already soft financing conditions, relatively low energy
prices and accelerating external demand. In parallel, export performance is set
to improve.
Company investments and net external
trade would compensate for slowing household consumption. The latter has traditionally been an important contributor to GDP
growth, a reflection of the high income level the country has attained.
Continued strong wage growth given high inflation supported private consumption
throughout the crisis. However, this also resulted in a further deterioration
of external cost competi­tiveness, prompting the Belgian authorities to pursue
wage moderation policies. This moderation has been confirmed by the new
government, resulting in a protracted period of low wage growth. While current
low inflation partly offsets the effects of low income growth, private
consumption growth is expected to slow down from next year.
Furthermore, household investment is
expected to show modest growth rates in future.
Before 2008 the private housing market performed strongly for several years,
partly due to supportive fiscal measures. Investment in homes contracted on
average in 2008-13. Overall, house prices rose by about 50% in real terms in
2000-08, but did not see a significant price correction as they remained broadly
stable. The housing market is looked at in depth in section 2.4.
 Graph 1.2:     Inflation (y/y %change) 
 Source: European Commission 
Inflation: gradual rebound in the course of
2015 after going into negative territory
Price pressures have been abating since
2012. Sharper competition on domestic energy
markets as well as wage moderation were the initial drivers. Over the past year
a VAT reduction and falling international energy prices added to the downward pressure.
As a result, headline inflation fell back to zero at the end of 2014 though
core inflation was still well above 1%.
This downward trend is set to continue
with inflation turning negative in the first half of 2015. As the substantial downward pressure from energy items fades, a
slow uptick is forecast for the second half of 2015. Overall, the general price
level is expected to rise by just 0.1% in 2015. At 1.1%, it is estimated that
price pressures will remain muted in 2016: prices for most components are
expected to experience an extended slowdown due to timid economic activity,
stagnant wage growth and international price developments.
Labour market: cyclical improvement but
lasting structural issues 
The slow-moving recovery and the legacy
of a prolonged crisis make for a muted labour market turnaround. Prior to 2008, the Belgian unemployment rate compared favourably
with the euro area average as well as with the rates observed in most
neighbouring countries. Since the outbreak of the crisis, it has crept up to
reach a ten-year high of 8.5% last year. As job creation in the private sector
picks up, unemployment is expected to decrease to 8.1% in 2016. All the while,
vacancy rates have remained comparatively high, suggesting matching issues.
Furthermore, a high proportion of the population of working age has pulled out
of the labour market entirely, as reflected in a low activity rate, in
particular for older workers. The various bottlenecks in the Belgian labour
market are probably the country’s deepest-rooted challenge. They are analysed
in more detail in section 3.1.
High labour taxation is one of the
issues in play. As well as the perverse effects it
has on external competitiveness and employment, high marginal rates also
discourage people from working, or working more. Taxation in general is looked
at in section 3.2. Shifting taxation away from labour — one of the Council
recommendations to Belgium for several years — has been a major point of
discussion on the Belgian political stage of late.
 Graph 1.3:     Labour market indicators 
 Source: European Commission 
Current account: returning to surplus despite
continuing goods balance deficit
Until 2007 Belgium saw a steady decline
in its long-running current account surplus. The
main driver was the trade balance, with a narrowing goods balance only
partially offset by a rising services surplus. The latter has been fairly
stable in recent years at about 2% of GDP. Terms of trade losses due to rising
commodity prices and export volume growth being outpaced by import growth were
behind the constant worsening of the goods balance. The deterioration
accelerated in 2008 and the goods trade balance has been in deficit since.
Recent developments have been more encouraging,
with the current account balanced in 2013 and expected to have recorded a
surplus in 2014. This shift has its origin mainly
in the capital income balance, which in 2013 recorded its highest surplus since
2000 ([1]) and appears
to have strengthened further since. To some extent, this reflects a cyclical
event resulting from strong gains in financial markets. Yet, the goods balance
has also staged an improvement in recent years: from a deficit of almost 3% of
GDP in 2011-12 to an estimated deficit of 1.5% in 2014. Whether this heralds a
trend reversal needs further confirmation, given the important contribution of
price changes as well.
 Graph 1.4:     Current account balance (%GDP) 
 - BPM5 methodology until 2007, BPM6 thereafter - 2014: 4Q-2013/3Q-2014 Source: European Commission 
The tentative improvement in external
performance is also evident in the export market shares. Over the longer term, services have on average delivered a small
positive contribution while goods were generally unable to keep pace with
global export growth. Substantial losses in export market share in 2010-12 were
followed by a gain in 2013. This was the first since 2009, and the largest in
many years. Nevertheless, over time Belgium’s share of export markets has
suffered a large drop. The dual trend of dwindling export market shares and a
weakening current account balance has been pointing to weakness in its ability
to compete. Belgium’s external competitiveness is examined closer in sections
2.1 and 2.2. These sections build on findings from previous In-Depth Reviews
and try to see whether the recent apparent improvement in external performance
can be linked to recent developments in cost and non-cost competitiveness.
 Graph 1.5:     Export market shares: evolution and breakdown 
 Source: European Commission 
 Graph 1.6:     Net international investment position (NIIP, %GDP) 
 Source: European Commission 
Overall external position: still very strong
The external sustainability of the
Belgian economy is considered robust given its very positive net international
investment position (NIIP). The 'NIIP' reflects the
balance between external financial assets and liabilities. It has been stable
at around 45-50% of GDP. Whereas the current account balance equals flows, the
NIIP can be interpreted as the stock indicator of a country’s external
position. Considering the accumulated net external assets, this means that
Belgium could afford a modest current account deficit without jeopardising
overall external sustainability.
While external sustainability does not
seem to be at risk, a closer look at the net international investment position
reveals that internal balances are nevertheless affected. The strongly positive NIIP reflects the creditor status of the
private sector, which broadly offsets the structural debtor position of the
public sector. The crisis years shifted the external lending position of the
overall economy from a steady surplus towards a broadly balanced position. This
is in line with what has been observed for the current account balance.
 Graph 1.7:     Net lending/borrowing by sector (%GDP) 
 Source: European Commission (ESA2010) 
Public finances: increase to be halted
following narrowing of fiscal deficit
The high public debt has been a constant
feature of the Belgian economy in recent decades.
The long effort to reduce debt stopped in 2008 when the authorities were forced
to support several failing financial institutions and the economic crisis
pushed public finances into the red. The deficit hit a high of 5.5% of GDP in
2009. It fell to 2.9% in 2013 but is estimated to have widened again to 3.2% in
2014 on the back of looser fiscal policy and disappointing revenue growth. In
2015 and 2016 the fiscal deficit is expected to narrow again, falling back to
2.6% and 2.4% of GDP respectively, according to the latest Commission forecast.
This reflects consolidation measures recently taken at all levels of
government.
The debt level rose from 86.9% of GDP in
2007 to around 106% in 2014. With still weak
nominal growth in 2015 unlikely to offset the impact of further deficit
accumulation and stock-flow adjustment, Belgium’s debt is projected to hit
almost 107% of GDP, before stabilising in 2016. In addition, contingent
liabilities related to guarantees to the financial sector remain not
inconsiderable. They have been decreasing steadily but risks are concentrated
on one single entity, worth 9.4% of GDP at the end of 2014. Public debt and its
implications for the overall macroeconomic stability of the Belgian economy
will be discussed in section 2.3.
 Box 1.1: Economic surveillance process The Commission’s Annual Growth Survey, adopted in November 2014, marked the start of the 2015 European Semester, proposing that the EU pursues an integrated approach to economic policy built around three main pillars: boosting investment, accelerating structural reforms and pursuing responsible growth-friendly fiscal consolidation. The Annual Growth Survey also proposed streamlining the European Semester to increase the effectiveness of economic policy coordination at the EU level through greater accountability and by encouraging greater ownership by all actors. In line with streamlining efforts this Country Report includes an In-Depth Review — as per Article 5 of Regulation no. 1176/2011 — to determine whether macroeconomic imbalances still exist, as announced in the Commission’s Alert Mechanism Report published in November 2014. Based on the In-Depth Review of Belgium published in March 2014, the Commission concluded that the country was experiencing macroeconomic imbalances requiring monitoring and policy action. In particular, developments with regard to the external competitiveness of goods continued to deserve attention as a persistent deterioration would threaten macroeconomic stability. This Country Report includes an assessment of progress towards the implementation of the 2014 Country-Specific Recommendations adopted by the Council in July 2014. The Country-Specific Recommendations for Belgium concerned the correction of public finances, tax reform, the long-term impact of ageing costs, labour market reforms, competitiveness measures and greenhouse gas emissions. 
 Table 1.1:       Macroeconomic Imbalance Procedure: scoreboard 
 Notes: (1) Figures highlighted are those falling outside the threshold established in the European Commission's Alert Mechanism Report. For REER and ULC, the first threshold applies to euro area Member States. (2) Figures in italics are calculated according to the old standards (ESA95/BPM5). (3) Export market share data: total world exports are based on the fifth edition of the Balance of Payments Manual (BPM5). Source: European Commission 
 Table 1.2:       Key economic, financial and social indicators 
 (1) Domestic banking groups and stand-alone banks. (2) Domestic banking groups and stand-alone banks, foreign-controlled (EU and non-EU) subsidiaries and branches. (3) Real effective exchange rate (*) Indicates BPM5 and/or ESA95 Source: Commission, 2015 winter forecast; ECB 
Belgium's
real effective exchange rate (REER) has been appreciating over the past decade
(see Graph 2.1.1). This
trend points to a loss in cost competitiveness relative to other euro area
Member States. The REER deflated by unit labour costs has appreciated the most,
suggesting that the loss can be traced back at least partly to unfavourable
labour cost dynamics. However, measurements based on broader price deflators
have also been appreciating over the years. On the basis of the REER
developments, the loss in cost competitiveness relative to euro area peers
appears still limited, at up to 5% over the past decade. However, within the
context of a currency union it is crucial to avoid a structural
underperformance relative to fellow members. The build-up of a cost
disadvantage comes with job losses and will even­tually provoke a correction if
left unaddressed. The following sections look into developments in the main
cost factors for most companies: labour costs, energy costs, and the cost of
intermediate service inputs. Policy measures to address the underlying problems
are discussed as well.
 Graph 2.1.1:   Real effective exchange rate (100 = EA18 2005) 
   
 Source: European Commission 
Labour cost
Belgian labour costs have on average
outpaced those in neighbouring countries (see Graph 2.1.2). This
is despite the coordinated, top-down wage-setting mechanism, discussed below.
Wages grew especially fast between 2009 and 2011, when the inflation
differential with neighbouring countries was particularly high.
 Graph 2.1.2:   Hourly labour cost evolution in the business sector 
 Source: European Commission 
The fast growth rate added to the
country's already high labour cost level. In 2013,
Belgium's hourly labour costs were the third highest among EU Member States for
the total economy and the second highest for industry (see Graph 2.1.3). The difference mostly reflects
Belgium's high social security charges on labour, which add to the large tax wedge
discussed in section 3.1. It also underscores the importance of a broad-based
tax shift towards non-labour tax bases, as discussed in section 3.2.
While labour cost levels need to be
analysed in function of productivity and composition of economic activity,
absolute levels have an important signal function for international investors. Multinational manufacturing companies compare the labour costs of
(prospective) plants across countries with comparable productivity levels. This
is reflected in developments in the Belgian automobile industry, which has
suffered substantial job losses over the years, often to other European plants
located in countries that cannot be considered to be low-cost producers. This
points to the generalised problem of high labour costs for the Belgian economy,
with also higher-skilled, highly productive jobs being jeopardised.
 Graph 2.1.3:   Hourly labour cost levels (2013; EUR) 
 * 2012 data for NL industry; Including those wage subsidies granted through the withholding tax, such as for shift labour, researchers and the general reduction. Source: European Commission 
The wage-setting
framework
An important part of total wage growth
is due to the practice of automatic wage indexation. Wages in Belgium are commonly adjusted for
inflation in a mechanical way through indexation clauses in sectoral collective
bargaining agree­ments. The almost universal
applicability of some form of indexation introduces a degree of solida­rity
between stronger and weaker sectors and helps to assure social stability.
However, at the same time it dilutes the signalling role of relative wages,
which risks resulting in avoidable job destruction. Wages in countries where
the practice of automatic wage indexation is less widespread are also adjusted
to rising prices, though in a less mechanical way so that labour market and
business cyclical elements can be factored into wage negotiations. This allows
temporary shocks to be partly absorbed through real wage reductions rather than
permanent job losses.
Higher price pressures have led to fast
wage growth, with the wages of nearly all workers being automatically adjusted
for inflation. In turn, this has exerted upward
pressure through the creation of ‘second round’ effects, not least because of
the widespread practice of indexing prices, especially in less competitive
sectors. Furthermore, projections for wage growth prompted by wage indexation
have generally been underestimated when setting the margin for real wage
growth. Real wage increases in Belgium result from a
stepwise process, starting at the national level with
social partners negotiating every two year an ‘interprofessional’ agreement
(IPA). One element of the intersectoral IPA is the wage norm, the maximum
increase in hourly wages that can be granted during subsequent collective
bargaining at lower levels, in particular at the sectoral level.
The national wage norm introduces a high
degree of coordination among sectors, which is further enhanced by other
national standards, e.g. on minimum wages, which set the boundaries for
negotiations between the social partners at lower levels. This macroeconomic wage policy is based on the 'Law of 1996', which
was introduced to safeguard the cost competitiveness of the Belgian economy. To
that end, the ex-ante margin for wage growth is set on the basis of the
projected development of hourly labour costs in Germany, France and the
Netherlands. Adjustments for inflation and automatic wage scale increases fall
outside the scope of the law, and are guaranteed on the basis of what was
decided in the applicable collective bargaining agreements.
In case social partners fail to come to
a comprehensive agreement, the federal government can decide to step in, as it has
done in recent IPAs. To facilitate agreement,
authorities have often made the precise apportionment of reductions in social
security contributions and increases in wage subsidies and social allowances
the subject of negotiations between social partners. As budgetary room for
manoeuvre has continued to narrow, it has become increasingly difficult for the
federal government to play this role of 'midwife' in the negotiations between
the social partners. Discussions at the national level have become less successful,
with negotiations on the IPAs covering 2011-12 and 2013-14 failing. This has
led the government to intervene more directly, giving wage bargaining a more
centralised character than before. 
With hindsight, consecutive wage norms
have been largely respected but were set too high.
Underlying assumptions resulted in over-optimistic margins for real wage
increases, for which no corrections were made afterwards. Growth in hourly
labour costs in the three reference countries has been repeatedly overesti­mated.
The wage cost differential this has created has become entrenched as the
ex-post verification of follow-up and the appropriateness of the ex-ante wage
norm has failed. Indeed, the correction mechanisms provided for in the Law of
1996, with wage overruns under the previous wage norm being compensated under
the next one, have never been applied in practice. This was due to lack of
consensus between the social partners and within the government, and to the
fact that guaranteed wage increases (indexation and wage scales) largely ate up
the room for correcting excessive past wage growth. Maintaining the use of a
macroeconomic wage norm thus requires basing the norm on actual wage changes in
neighbouring countries or more adequate ex-post correction mechanisms to
compensate for the difference between projected and effective hourly labour
cost developments in the reference countries.
Another major shortcoming of the
wage-setting system is its disconnection from domestic productivity
developments, which are not considered when determining the wage norm ([2]). In principle, a faster rise in hourly
labour costs can be justified if productivity growth is also greater than in
competing countries. However, productivity gains in Belgium have been modest.
This is made clear by the development of unit labour costs (ULC). These reflect
the cost of labour inputs to productivity developments.
 Graph 2.1.4:   Development of unit labour costs (2000 = 100, total economy) 
   
 Source: European Commission, OECD 
As illustrated in Graphs 2.1.4 and 2.1.5, the gap between Belgian ULC and
the weighted average of ULC in neighbouring countries has widened consistently
over the past decade. As shown, this is due both to
a slowdown in relative productivity gains (compared with the reference
countries) and to faster increases in hourly labour costs. This naturally
affects the export performance of the Belgian economy since, together with
non-cost elements such as quality, unit labour costs determine the ability of
Belgian companies to compete internationally. Whereas the graph shows aggregate
data for the entire Belgian economy, the rise in ULC has been particularly
steep in manufacturing industries ([3]) according to a 2013 report ([4]). Factors driving overall productivity are looked at in more detail
in section 2.2. However, but it can already be highlighted that, when
contemplating ways to improve the situation, attention will have to be paid
both to stagnating productivity and the increasing wage costs.
 Graph 2.1.5:   Productivity and wage evolution (2009 = 100) 
   
 Source: European Commission 
As the wage norm is based on hourly
labour costs in the neighbouring countries, Belgian labour costs are indirectly
linked to producti­vity developments in these countries. Introducing a link with domestic productivity trends would better align
wage cost with the goal of preserving employment. Productivity levels in
Belgium are generally high and thus compensate to some extent for high labour
costs. However, this positive aggregate picture disguises important differences
in performance between sectors and asymmetries between companies within the
same sector ([5]).
Furthermore, high labour costs appear to
have led to fast capital deepening in manufactu­ring, contributing to the high
level of productivity. Strong increases in labour
costs create incentives for companies to introduce more capital intensive
production methods, which mitigate the impact on unit labour costs but reduce
labour demand. This results in job losses for low- to medium-skilled labour,
which in turn harbours problems for the sustainability of the social model.
This process of capital intensification has its limits, though, as it is
subject to the pace of technological progress and has already reached a high
level . Also, if other countries pursue strong wage moderation policies,
as some did prior to and in the wake of the crisis, this results in a fast
deterioration in external competitiveness.
Seniority-based wage growth also
contributes to the general problem of decoupling of productivity and wage
developments. Most collective bargaining agreements
covering white-collar workers include seniority-based wage scales,  with
seniority used as an imperfect proxy for individual productivity developments.
However, productivity generally slows down at some point during one's career as
the marginal return on acquired experience declines ([6]). Among other factors, seniority-based compensation also contri­butes
to the low employment rate for workers above 55 (see section 3.1) as it
inhibits mobility and deters timely job-switching by pushing up the reservation
wage, which in turn hurts employment prospects. The federal government has
announced that it will take initiatives to reduce the weight of seniority in
wage growth within the context of the planned rationalisation of the Joint
Committees. The High Council for Employment has put forward several options in
this regard.
Recent trends and
policy measures
As Graph 2.1.2 shows, the growth rate in hourly
labour costs in Belgium has slowed markedly in recent quarters ([7]). While a slowdown is obvious in the
light of fading inflationary pressures since 2013, it is important to note that
the growth rate of labour costs has also converged with that observed in the
neighbouring countries. In the first nine months of 2014 they rose by 0.8% for
the total economy, against 2.8% on average in 2001-13. So far, the wage
slowdown has been more pronounced in the services sectors than in
manufacturing, though at 1.2% labour cost growth in the first nine months of
2014 has also been decelerating in the manufacturing sectors.
 Box 2.1.1: Performance of manufacturing activities 
 Belgium has been no exception to the long-term trend of deindustrialisation in advanced economies. This trend is intrinsically positive as it reflects how more services are consumed as countries grow wealthier. The flipside is that manufacturing (1) is no longer a major source of job growth in advanced economies. Despite a fall of its relative economic weight, it remains nevertheless an important driver of added value and of – generally well-paid – employment. It remains also the key contributor to productivity growth, innovation and trade (2). Aside from these direct effects, there are important spill-over aspects that should be taken into account since industrial activity creates demand for services with a high value added such as R&D or logistics. While this interplay works in both directions, the intermediate use of services by the industry is higher than the intermediate use of industrial output by the services sectors (3) with only 26% of the Belgian economy composed of stand-alone services (4). For these reasons, a fast dwindling of manufacturing activities is not without danger for the performance of the overall economy, not least because the sector creates many jobs for middle class workers.   
 Table 1:         Share of manufacturing industry in total employment 
 Source: European Commission 
The decline of manufacturing
  in Belgium appears nevertheless to be higher than in other countries (5).
  When looking at employment, the share of manufacturing jobs in total
  employment has fallen across the board. This reflects rising  productivity
  through optimization,  innovation and automation of production processes as
  well as the outsourcing of certain  activities that were
_________________________________
(1)     Industry
  excluding mining and utilities.
(2)     McKinsey
  Global Institute, Manufacturing the future: the next era of global growth and
  innovation, 2012.
(3)     Avonds,
  L., De gecumuleerde kosten 1995-2005, Working Paper 9-13, FPB, 2013.
(4)     Roland
  Berger, Reindustrializing Flanders – the burning platform, Voka management
  report, 2014.
(5)     In
  2013, BE had the lowest EU27 share of activities traditionally considered
  'tradable' (Nace rev.2 A, B-E, G-I, J) in total employment and one of the
  lowest shares in total value added.
(6)     See
  In-Depth Review, 2014.
(7)  
  Roland Berger, 2014.
erstwhile performed in-house. However, for Belgium
  the decrease has been steeper than in other EU15 Member States (see Table 1). When looking
  at the evolution of employment in absolute levels, the manufacturing sector
  in Belgium has shrunk by more than half since 1970. Aside from the factors
  described, this reflects the high degree of capital deepening in the Belgian
  industry in response to elevated labour costs. This deteriorating cost
  competi­tiveness manifests itself also in the downward evolution of profit
  margins (6).
Also in terms of the share in total value added the
  loss for Belgian manufacturing sectors has been more pronounced (see Graph 1). This reflects
  mainly a price effect with value added in constant prices sketching a more
  stable picture. This relates to Belgium's specialisation in intermediate
  products (see section 2.2), which makes it difficult to pass on rising input
  costs to final prices. The experience in other countries demonstrates that
  curbing trends in the manufacturing sector is achievable if a focus on
  innovative activities is maintained. Countries that performed better in the
  past decade (DE, AT & SE) were found to have a comparatively large
  machinery sector with focused spending on R&D, resulting in a higher
  share of high-end products. Other important prerequisites are access to a
  skilled labour force, a solid business service sector and a generally
  favourable business climate (7).
 Graph 1:        Share of manufacturing industry in total value added 
 Source: European Commission. 
 Graph 2.1.6:   HICP (annual % change) 
   
 Source: European Commission 
In addition to low inflation, the
slowdown in relative labour cost growth rates is the conse­quence of a number
of government measures affecting both wage indexation and real wage increases. As well as the decision to freeze wages in real terms in 2013-14
and reduce certain employer social security contributions, the previous
government made successful attempts to rein in price pressures. Past inflation
was on average higher than in the euro area and the neighbouring countries (see
Graph 2.1.6), which can be a problem as monetary
policy within a monetary union is geared towards the aggregate.
To mitigate the vicious inflation-wage
cycle, Belgian authorities have been focusing efforts on tempering inflationary
pressures. To this end, the functioning of the
domestic energy and telecom markets was improved. For energy, the ensuing price
effect has been compounded by the reduction in the VAT rate for electricity
since April 2014, though this effect will dissipate over the course of 2015.
Finally, there have been several changes in the way the health index, to which
wages and benefits are linked, is calculated. Taken together, these measures have
brought inflation into line with neighbouring countries (see Graph 2.1.6). Still, on average, core inflation
remained 0.5 pp. higher in 2014, mainly due to higher price inflation for
services and processed food items. This underscores how continued vigilance
with regard to market functioning remains warranted given that several product
and service markets have major shortcomings, while legacy costs risk undoing
the gains achieved in recent years on energy prices (see section 3.3).
The structural reductions in social
security contributions decided earlier have been maintained by the new
government. However, the timing of the reductions
(initially EUR 450mn each in 2015, 2017 and 2019) has been changed by combining
the 2015 and 2017 rounds in 2016 for a total amount of EUR 960mn (0.2% of GDP).
This comprises (1) linear reductions (EUR 300mn), (2) low wages (EUR 300mn),
and (3) wage subsidies for sectors exposed to international competition and
whose growth potential is at risk because of the evolution of labour costs
compared to productivity (EUR 360mn). At the same time, the federal government
has announced its intention to reduce the standard rate of employers’ social
security contributions from 33% to 25% by the end of the current parliamentary
term. This would be done by abolishing some of the existing reductions and wage
subsidies, which were partly introduced to offset high and rising labour costs
but have led to a complex system and may thwart foreign investments as they coexist
with high nominal rates. Ultimately, a comprehensive solution still involves a
broad tax reform (see section 3.2). This would create room for wage cost
reductions.
The new
federal government has also decided to continue the strategy of wage moderation
so that slow wage growth is projected to continue in future years. In recent years Belgian wages have been frozen in real terms as the
government allowed no increases on top of corrections for inflation, with a
zero wage norm applied in 2013-14. For 2015-16 the social partners have agreed
a national wage norm of 0.8%, which can be used only in 2016 ([8]). The government has decided to suspend all wage-indexation
schemes. This suspension will last until the health index has risen by 2%. On
the basis of the current inflation outlook, the 2% erosion in real wages will
materialise only slowly, leading to a prolonged period of very low wage growth.
According to simulations by the National Bank of Belgium, the suspension of
wage indexation implies, all other things being equal, a positive shock for
Belgian companies. Over a five-year period, the measure would yield
33 300 additional jobs, boost overall GDP by 0.5 pp. and lower inflation
by 1.1 pps., resulting in a further limitation of wage growth once indexation
is reactivated ([9]).
All in all, it appears that Belgium's
historic labour-cost gap is set to narrow steadily over the medium term
following corrective measures taken in recent years. To fully correct the historic labour-cost gap, additional measures
might be required as com­parably low inflation in trading partners limits
Belgium’s relative gains. This may involve continued wage moderation against
the back­ground of subdued inflation or further alleviation of the tax pressure
on labour.
To prevent past problems from recurring,
a revision of the Law of 1996 is envisaged. Headway
on this point is less tangible than for the corrective measures. As well as
projections, the wage norm would have to factor in actual wage developments in
the reference countries in the past two years. An automatic correction
mechanism for past increases above the norm would also be introduced.
Furthermore, the norm would be enshrined in a generally binding collective
agreement or Royal Decree if no agree­ment were reached between the social
partners. Lastly, enforcement of the law would be improved by tightening the
sanction mechanism for sectors or companies allowing wage increases surpassing
the norm. If enacted, such reforms would improve Belgium’s intersectoral wage
policies by strength­ening both preventive and corrective elements.
Evaluation of
progress made on labour costs
In spite of the measures listed,
important short­comings in the wage-setting framework have been left
unaddressed. It is unclear how devia­tions from the
national norm in lower-level nego­tiations between the social partners would be
made possible. Also, no action has been taken to bring wage and productivity
developments more closely into line, including at industry or company level.
Finally, wage indexation and seniority-based wage scales would continue to fall
outside the scope of the wage norm. This risks undoing certain planned
improvements to this norm if inflation differentials with neighbouring
countries start to rise again.
Therefore, initiatives to soften the
negative effects of how wage indexation is applied should not be a taboo. Indeed, the focus on safeguarding indexation in its current form
has led to several measures to lower inflationary pressures, which, although
not entirely unsuccessful, came at a high budgetary cost and could produce
unintended consequences, such as is the case for the decision to reduce VAT on
electricity consumption by households. Still, the government had to resort to
the drastic decision of blocking wage indexation altogether to correct for the
past. At the same time some of the problematic features intrinsic to the system
have been left unaddressed.
The use of all-in wage agreements could
com­pensate for the effect of non-anticipated indexa­tion. Such agreements cap nominal instead of real wage growth, as the
wage norm does. Their use was promoted in the 2007-08 interprofessional
agreement and about a quarter of all private sector employees were covered by
sectoral all-in agree­ments at that time. They help to shield the domes­tic
economy from exogenous commodity shocks, limit price volatility in case of
demand shocks (lowering the need for ex-post corrections) and allow for
differentiation between sectors and companies on the basis of productivity
differentials ([10]). Especially
for sectors or companies facing shrinking margins and heavily exposed to
international cost competitiveness promoting all-in agreements could be a
viable strategy to strike a more appropriate balance between labour cost growth
and employment preservation, on the one hand, and the exact timing of
corrections for inflation, on the other. 
Energy cost
The Belgian economy has a higher energy
intensity than the neighbouring economies and the euro area. These differences are mainly due to a different economic composition
of final demand. Exports have a particularly high energy intensity. This
reflects the fact that Belgium has a high level of energy-intensive industrial
activities, such as the (petro)chemical industry, which typically feed into the
country's exports and generate high value added. This intensity is also evident
in industry’s share of overall electricity and gas consumption (see Tables 2.1.1 & 2.1.2). Given Belgian exports’ high energy
intensity, it is important to ensure competitive prices for energy and gas, in
particular for big professional users.
 Table 2.1.1:     Share of total final gas consumption 
 Source: European Commission 
 Table 2.1.2:     Share of total final electricity consumption 
 Source: European Commission 
For natural gas, all three Belgian
regions were found to have cheaper prices for industrial consumers than DE, FR,
NL and the UK in 2010 ([11]). The positive gap was due to taxation
and network charges, with many large industrial users avoiding distribution
charges by being directly connected to the Belgian transport network. This
favourable situation has not changed significantly since ([12]).
Average electricity prices for companies
have converged with those in neighbouring countries, but this average probably
paints too rosy a picture of the situation faced by the largest industrial
users ([13]). For medium-sized industrial users (25GWh/y), Belgium’s regions
generally had the highest prices in 2010 due to higher taxes and levies. For
large industrial users (250GWh/y) the price difference with the other countries
was smaller — though purchased volumes are evidently higher — but prices were
still at the upper end, with higher taxes and levies. The federal authorities
have taken several measures since to tackle the situation. The federal
contribution to financing public service obligations and regulatory costs was
substantially lowered. In addition, the contribution was made degressive with
rising use and the absolute annual cost ceiling was extended to medium-sized
industrial users. A similar decreasing contribution formula was introduced for
the contribution to support offshore wind farms. However, rising charges at the
regional level have partially offset lower federal charges ([14]).
As a result, prices for large industrial
electricity users are still relatively high compared to neighbouring countries
although the difference has decreased since 2013 ([15]). This difference falls as consumption
rises, though for the largest consumers ([16]) prices in Flanders and Wallonia were still about 10% higher than
the average for the three benchmark countries in 2014 (see Graph 2.1.7 for a comparison for 500GWh). This
difference primarily reflects higher taxes and the incorporation of costs for
renewable energy support in network charges. France and the Nether­lands apply
low taxes for high electricity volumes, while Germany as well as the
Netherlands offer major discounts on network charges, a policy which France has
also introduced recently. 
The biggest charges for industrial users
are regional ones. Following the sharp decrease in
(federal) charges for offshore wind farms, (regio­nal) levies linked to the
purchase of certificates for green energy and combined heating accounted for
roughly 80% of total charges for the biggest industrial users in Flanders in
2014. Regional contributions to the purchase of green certificates amounted to
75% of total non-commodity costs for the same user profile in Wallonia. This
underscores the role of regional authorities in assuring the overall cost
competitiveness of their major industrial corporations. The legacy cost of
uncharged certificates, the costs of additional renewable capacity and the
precarious security of supply only add to the challenge for policy makers.
Costs linked to the creation of a strategic reserve in the light of recent
supply con­cerns again risk affecting big users significantly (see section
3.3).
 Graph 2.1.7:   Total electricity prices for base load profile of 500 GWh 
   
 Source: Deloitte/Febeliec (2014) 
At the federal level, the new government
launched the plan for an energy norm similar to the national wage norm. In practice, norms would be created for different user profiles.
The aim would be to ensure that the different price components are aligned with
those observed in neighbouring countries. Given that certain price components
are decided at the regional level whereas others are a federal competence, such
monitoring would require close collaboration between both levels. The fact that
federal attempts to lower energy prices in recent years have been partly undone
by higher regional charges highlights the potential problems a lack of
solidarity might create. Further­more, there is the risk of interfering
excessively on energy markets and further discouraging invest­ment in already
impaired domestic capacity. Enhancing grid inter­connectivity to ensure close
alignment between market prices for the commodity component would therefore
appear a more rewarding approach, on top of which the other price components
could by targeted by the different policy levels responsible. In this respect,
it will also be important to make sure that a tax shift (see section 3.2)
safeguards the competitiveness of the industrial sectors.

 Graph 2.1.8:   Breakdown of gross manufactured exports by value added (% of total, 2009) 
 Source: OECD/WTO TiVA 
Cost of service inputs
Services have become increasingly
interconnec­ted with the rest of the economy as they supply important inputs
for the production process of other sectors. In
2011, Belgian exporting compa­nies purchased intermediary inputs worth at least
EUR 10 000 from on average eight domestic com­panies that do not export
themselves as they are generally smaller and less productive ([17]). Many of these domestic suppliers are service providers whose
activities have become more tradable thanks to technological developments.
Services such as R&D, design, marketing and distribution represent more
than one third of the value added of total manufactured exports (see Graph 2.1.8).
 Graph 2.1.9:   Forward linkages and productivity growth of the Belgian service sectors 
          
 Source:  European Commission 
Domestic services thus form an integral
part of external competitiveness, even when they do not participate directly in
external trade. The existence of large and
increasing 'forward linkages' of services magnify their positive spillover
effects. Therefore, increased productivity growth in servi­ces, would translate
into increased competitiveness at the industry level. As illustrated by Graph 2.1.9 business services can be considered
particularly important as they have the largest forward linkages with the rest
of the Belgian economy. However, they also show negative productivity growth.
This highlights the importance of ensuring
these sectors function properly. To the extent that
business services are still relatively highly regulated and shielded from
competition, this indicates the untapped potential for productivity gains in
the sector and the wider economy. Considering that about half of the value
added by services in total exports is imported (see Graph 2.1.8), this could not merely improve cost
parameters for goods exporters but could also directly boost activity in the
services sectors. It has been estimated that more ambitious implementa­tion of
the Services Directive would yield additional gains of up to 1.7% of GDP for
Belgium in the long term.
The ability of a country to preserve and
even increase high income and employment levels can be greatly influenced by
cost factors. However, over the longer term a country’s performance is largely
determined by a number of structural factors that define its capacity to
withstand exposure to international competition. Previous In-Depth Reviews
highlighted that Belgium’s weakened external competitiveness also reflected its
performance on non-cost parameters. This section looks at the structural
components of competiti­veness and discusses policy measures.
Total factor
productivity
These structural factors and their
importance for the overall economic performance of a country are generally
captured by total-factor productivity (TFP). TFP
reflects an economy’s efficiency in allocating the labour and capital inputs
available for productive ends. The interplay with these inputs determines
potential growth (see Graph 2.2.1). The positive contribution from
labour inputs (total hours worked) in recent decades primarily reflects an
expanding labour force due to demographic trends, with hours worked per
employee much more stable. Belgium’s low participation rate still provides
ample scope for enhancing potential growth, though ([18]). This is discussed in section 3.1.
Total labour productivity growth is the
sum of TFP and capital deepening. As was discussed
in section 2.1 and presented in Graph 2.2.1, capital deepening in Belgium has been
solid in the past thanks to developments in manufacturing. This has led to a
high productivity level but has also limited the potential for future
productivity gains. Such gains would therefore have to come from TFP growth,
which in the long term is often considered to be the ultimate driver of growth
in advanced countries. Rising productivity due to an improvement in TFP would
also be more favourable for employment than capital deepening driven by labour
costs. 
However, TFP contributions to potential
growth have fallen to a very low level. This has
been the main driver behind the overall slowdown in productivity growth, with
capital deepening lower but still considerable. Even before the crisis TFP
contributions were assessed as lower than in neighbouring countries. Part of
the divergence over the past decade can be attributed to the creation through
subsidised schemes of — generally less productive — jobs for the low-skilled.
However, the difference in perfor­mance compared with neighbouring countries
predates these measures. An explanation might be the sectoral composition of
the Belgian economy. As discussed in section 2.1, Belgium has witnessed a
strong shift towards service activities. These generally show a lower
productivity growth rate.
 Graph 2.2.1:   Breakdown of potential growth 
 Source: European Commission 
Disappointing TFP developments point to
problems of non-cost competitiveness and the existence of certain
misallocations. Total factor productivity being
non-observable and computed as a residual ([19]), its precise determinants are generally hard to grasp. However, a
number of elements are commonly considered to be crucial drivers. These include
the quality of a given amount of inputs of human and physical capital, the
general business climate, the allocative capacity of the economy through the
labour and product markets, and innovation in its many aspects. A number of
these factors are discussed subsequently; others, which relate to the overall
functioning of the economy, are looked at in section three on other structural
issues. Before turning to performance on innovation and the business
environment, Belgium’s position in value chains is discussed to get a better
understanding of the non-cost drivers of the country’s export performance.
 Graph 2.2.2:   Global value chain participation index (%) 
   
 - backward integration: foreign value added content share of total gross exports - forward integration: value added content share of total gross exports by other countries Source:   European Commission, based on WIOD 
Position in value
chains
Belgium’s export market orientation
reflects the country’s tight integration into regional and international value
chains through the dense cross-linkages with the French and German economies
and the presence of important ports. Considering
the generally slow import growth of Belgium’s trading partners, this
traditional trade orientation has been one of the drivers behind a subdued
export performance and the general trend of falling export market shares for
goods. However, the deep integration into value chains (see Graph 2.2.2) also implies that Belgian exports
feed through into third countries’ exports, so that fast-growing markets are in
the end more important for Belgian producers than they appear at first sight.
 Table 2.2.1:     Manufacturing exports by type (%) 
 Source: European Commission 
Belgium’s overall position and specialisation
within these value chains is, however, unfavour­able due to its high labour
costs. Belgium is broadly positioned in the
intermediate range as Belgian exports mostly serve as inputs for final products
(see Table 2.2.1). Conversely, Belgian companies export
few capital goods: their share in manufactured exports is less than half that
of the average euro area country and neighbouring countries. Furthermore, their
share has fallen steadily over time. Margins for intermediate products are
generally lower as their product differentiation is also lower, resulting in
strong price competition. This makes it hard to pass on the costs of imported
commodities and domestic labour inputs into final prices without running the
risk of losing market shares. 
This fits with findings on the average
quality of the products Belgium exports, another indicator relevant to
specialisation. The typical Belgian manufactured
product is of medium to low quality, i.e. skewed to the left in Graph 2.2.3. Moreover, between 2005 and 2011
Belgium saw quality deteriorate as the share of products considered 'top'
quality declined sharply. On average product quality, the common peer countries
are generally found to perform better, as do most EU-15 countries. This is
particularly the case for France and Germany.
Given Belgium’s product specialisation,
a misalignment seems to exist with its high labour costs. To compensate for the latter and allow for future export growth, a
general upscaling of the product range would be beneficial. This highlights the
importance of fostering broad-based innovation. 
Innovation
Innovation is paramount in speeding up
the transition to a more knowledge-intensive economy as it allows for
specialisation in new or better products and services with higher added value
and lower price-sensitivity. Innova­tion can take
several forms, resulting in different outcomes. Whereas process innovation
increases efficiency and lowers costs, product innovation allows the creation
or improvement of products which can be sold at a premium or be used to tap
into new markets. The latter’s beneficial effect on external competitiveness
and the domestic economy is clearly longer-lasting.
 Graph 2.2.3:   Quality rank of export products 
 Source: Vandenbussche, H., Quality in exports, EC-DG ECFIN, Economic Papers 528, 2014. 
Belgium is considered to have a
high-quality research system, with particularly strong public research
institutions and universities. Busines­ses have
many opportunities to cooperate with both and have been increasing expenditure
on R&D. Total spending by all actors rose from a low of 1.8% of GDP in 2005
to 2.3% in 2013 (see Graph 2.2.4), with the main increase stemming from
business expenditure: from 1.2% of GDP in 2005 to 1.6% in 2013. The
continuation of this trend would push Belgium to within reach of its 2020
target of 3%. The gap to the five best performing EU countries has narrowed
over the period under consideration, but was still 0.8 pp. of GDP in 2013.
 Graph 2.2.4:   R&D intensity (%GDP) 
 Note: 5 best performing countries in 2013: FI, SE, DK, DE & AT Source: European Commission 
The overall increase in business R&D
intensity in recent years has been principally driven by a particularly good
performance in the bio-pharmaceutical sector. In
this sector, high scientific quality, business investment, product innovation
and trade performance reinforce each other. Knowledge intensification and
broadening of the innovation base beyond this sector has improved but
there is potential for further progress.
The rising total R&D intensity also
reflects stronger public support for business spending as the different levels
responsible have developed detailed policy plans over the years. The federal level has focused on fiscal incentives with a payroll
withholding tax exemption for researchers of 80% and an equal deduction for
patent revenues ([20]). Regions
provide direct support through subsidy schemes as well as indirect support
through facilitator policies, with e.g. a focus on clusters in Wallonia — a
policy which Flanders has announced it will give more emphasis to as well.
Access to public support is, however,
conside­red complex and time-consuming, and the support available fragmented. This discourages absorp­tion, especially by smaller companies. A
prolifera­tion of initiatives and institutions also weakens the focus of
policies. Consequently Belgium has been recommended to streamline incentive
schemes and reduce administrative barriers.
The new Flemish and Walloon governments
have announced their intention to address the suboptimal efficiency of
innovation support. Flanders plans, for instance, a
rationali­sation of the current landscape of intermediate structures and has
started merging some entities. Wallonia plans to assess all types of financial
assistance to firms in order to simplify the overall system. A point that
merits additional attention is the overall coordination of the policy mix.
Although the funding of business R&D is split between the federal
government and the regions, there is no organised coordination to ensure that
support is optimally balanced between the different instru­ments and that
trans-regional synergies are fully exploited.
In spite of Belgium’s relatively solid
perfor­mance on R&D spending and other input parameters, performance
indicators for innovation output paint a more mixed picture. The strengths of the research and innovation system are
inadequately translated into economic performance, with Belgium generally
lacking fast-growing firms in innovative sectors. This is also evident in the
comparatively low share of total company sales resulting from new innovations.
To strengthen the translation of research into commercial products, the Walloon
govern­ment agreement sets out its intention to reinforce its Marshall Plan by
concentrating on innovation policy measures with the highest value added in
terms of job creation and commercial valorisation. Flanders aims to strengthen
inno­vation by means of a cluster policy.
Bottlenecks discussed in other sections
on taxation and labour market performance contribute to the overall innovation
challenge. Site selection for R&D operations is
primarily determined on the basis of access to qualified staff, universities,
R&D funds and suppliers. For decisions on the location of actual
labour-intensive manufacturing activities based on research carried out, labour
costs are a more important factor. This underscores the importance of
rebalancing overall tax pressure, as discussed in section 3.2.
The translation of technology into new
ideas and products also hinges on the availability of a vast pool of
aptly skilled workers. While Belgium has a
generally well-qualified workforce with a high participation rate in tertiary
education, the share of science and engineering graduates remains low.
Shortages in these fields could become a major barrier to innova­tion, with
shortages already emerging for certain functions. This is the case for
professional digital skills, for example. Whereas Belgium has good broadband
infrastructure and is above the EU average in computer and internet skills,
there is a shortage of qualified ICT experts such as applica­tion developers.
In 2014, 37.7% of enterprises with job vacancies requiring specialised ICT
skills reported problems in filling these positions. For the ICT workforce
alone, the shortfall is expected to rise from about 8 000 in 2012 to
30 000 in 2020 ([21]). On the
matching between education systems and the labour market, see section 3.1.
In addition, companies could pay more
atten­tion to lifelong learning throughout the career of their employees. Belgian companies perform rather poorly on participation in
lifelong learning ([22]). However, on-the-job training yields both a wage and a productivity
premium, with the latter exceeding the former. Productivity gains from training
are slightly higher in the non-manufacturing than in the manufactu­ring
sector ([23]). Another enabler of innovation is 'entrepreneurship', which in turn
is greatly influenced by the general business environment and the quality of
public services.
Business environment
As well as an unfavourable product mix,
there is also the fact that relatively few new Belgian companies are created. Belgium generally performs weakly on entrepreneurship. It has a very
low start-up rate (see Graph 2.2.5), which suggest a business climate
that is unfavourable to the generation of new activities and natural expansion.
This in turn lowers the pressure on existing firms to become more efficient.
Considering that the main source of job creation is young rather than merely
small firms ([24]), it is
paramount to facilitate the natural expansion of new companies. 
The low start-up rate can be related to
several factors discouraging company expansion, including, once more, high
labour costs. To soften the burden for start-ups,
social security contributions were lowered for the hiring of the first three
employees. This federal reduction was recently increased as well as expanded to
the first five employees. Company expansion beyond this level nevertheless
remains hampered, which might necessitate further action and points again to the
general need to shift taxes away from labour. Certain non-labour taxes also
come across as very counterproductive for entrepreneurship. This is the case
with a number of smaller taxes on capital goods levied at the local level, e.g.
on propulsion.
 Graph 2.2.5:   Rate of company start-ups (%, avg 2008-12) 
   
 * Start-up rate: ratio between the number of new firms entering the market and the total number of firms Source: European Commission 
Apart from regulated professions,
starting a company in Belgium is generally easy in terms of procedures, though
associated costs are considerable. Indeed, the
World Bank’s Doing Business report ranks Belgium 14th out of
189 countries for ease of starting a business, with a low number of procedures
to go through and days involved. Businesses are, however, required to have
relatively high levels of minimum paid-in capital, for which Belgium ranks only
167th. In addition, a certificate of company management is required
to be allowed to start a commercial activity. The objectives of company
survival and smooth market access therefore do not appear to be well balanced,
as is evident from the low start-up rate. Start-up rates have been found to
show a robustly positive reaction to changes in the cost of starting a business
and exporting, even during the crisis.
Belgium ranks only 130th out
of 144 countries on the World Economic Forum’s 'burden of government
regulation' indicator. Like support for innovation,
access to employment and business support schemes is greatly hampered by their
vast number. Overall, administrative costs for businesses represented 1.7% of
GDP in 2012, with the majority borne by smaller companies and the
self-employed ([25]). The
overall burden is found to have fallen by half since 2000. Additional gains
could probably be achieved by expanding use of ICT solutions in public
administration. This would be of particular benefit for fiscal administra­tive
procedures, whose costs have risen in recent years while those for employment
and environment procedures fell. Existing e-government services are not always
considered efficient, according to the 2013 Public Sector Innovation
Scoreboard. Modernising and simplifying administrative requirements could, in
other words, yield important gains in terms of entrepreneurship and business
dynamics. 
The low penetration of ICT also hampers
the judicial system, as the 2015 EU Justice Scoreboard shows. Maintaining initiatives already started to improve the use of ICT
solutions will be of particular importance to supporting the implementa­tion of
recent judicial reforms and to helping courts handle the high number of
incoming cases. Certain measures that could support the quality of the justice
system are still missing, though. In particular, Belgium does not provide data
on efficiency indicators for the international exercise assessing judicial
systems. This comparative approach supports efforts to modernise the judicial
system in Member States. Concerns have also been raised by the new College of
courts and tribunals over whether the justice reforms can be carried through in
the context of reduced budgets.
 Box 2.2.1: Adequacy of public infrastructure 
 The availability of and the smooth access to public infrastructure are important facilitators of produc­tivity. Higher spending on transport and electricity infrastructure has been found to positively impact economic growth, provided no excess capacity is created (1). Investments serve to maintain the quality and volume of the existing infrastructure or to expand it. As a consequence, persistent cutbacks in investment budgets or a continuous deferral of maintenance works may over time result in a significant deterioration of a country's capital stock. Belgium has important investment needs, the tackling of which would give impetus to produc­tivity growth and overall economic performance. Transport infrastructure is the most obvious example (cf. infra), but the country's infrastructure gap surpasses network structures, touching also on education and social infrastructure despite long-term demographic trends that could have been anticipated. Communities have outlined plans to improve the capacity and quality of the educational infrastructure. Graph 1:        Net fixed capital formation: general gov't 
 Source: European Commission 
This broad-based adequacy problem of
  Belgium's public
  infrastructure reflects the persistently low rate of public investment. This
  rate has fallen back to 2.2% of GDP in 2013, near the very bottom of all EU
  countries. Fiscal consolidation in recent decades has been skewed towards
  investments, a policy choice which has never been fully reversed. In this
  respect, public spending priorities have not always been optimal despite high
  aggregate government spending. Since the end of the 1980s net investment –
  i.e. corrected for use and wear –has been negative on average (see Graph 1), implying that the stock of public investments has shrunk. 
Total spending on (non-housing) construction (2) gives a
  somewhat better picture (see Graph 2), though performance remains below that of most other countries (3).
  Some catching-up appears to have taken place in recent years.
 Graph 2:        Gross fixed capital formation of non-residential construction and civil engineering: economy-wide (% of GDP) 
 Source: European Commission 
The most
  pressing gap with respect to the general business climate and attractiveness
  of the Belgian economy probably relates to the transport network. The quality
  of the latter is of utmost importance to fully exploit the country's favourable
  geographic position, which provides the country with a natural advantage for
  the establishment of a logistics base, headquarter or distribution centre.
  This is underpinned by the World Bank's global 'Logistics Performance Index'.
  In 2014 Belgium ranked 3rd in the global ranking, up from the 12th
  position in 2007. 
The level of
  satisfaction with the quality of the transport infrastructure is one of the
  elements assessed by the World Economic Forum's 'Global Competitiveness
  Index' (GCI). The most recent GCI ranks Belgium 20th worldwide in
  relation to its general transport infrastructure. Especially the satisfaction
  with port infrastructure is high: Belgium is ranked 6th worldwide.
  For airport infrastructure Belgium ranks 15th. Both for port and
  airport infrastructure the ranking is rather stable over the period 2006-15. 
However, the situation is different for the
  satisfaction with road and rail infrastructure. Whereas for road
  infrastructure Belgium was still ranked 10th worldwide in 2006-07,
  its ranking has dropped to the 27th position since. For rail
  infrastructure, the ranking went from 11th in 2010-11 to 14th
  in 2014-15. This steady decline in satisfaction with the Belgian road and
  rail network
   ||   
   || (Continued on the next page) 
 Box (continued) 
 indicates that further improvements are needed in order to maintain Belgium’s position as a hub for European and international logistics.  To be sure, scope for upgrading or expanding the basic transport infrastructure appears to be ample, especially considering the high concentration of economic activity around the capital and the several ports. Indeed, congestion and missing links are key issues of concern for the Brussels and Antwerp ring roads. In particular action on the Antwerp bottlenecks has been delayed repeatedly.  For rail infrastructure the realisation of the Brussels Regional Express Network is the main workload. Following repeated delays due to licencing difficulties, finalisation of the network is currently estimated in 2025. However, available funding runs about EUR 500mn short of remaining needs (4). Both for road and rail infrastructure, coordination between the federal and the regional authorities will be crucial to ensure effective planning and project selection, as well as swift implementation. ||     || _________________________________________________________________________________________________________________________________________________________________________________________________________________ ([1])  European Commission, Infrastructure in the EU: Developments and impact on growth, DG ECFIN, Occasional Papers 203, 2014. (2)  In Belgium, certain infrastructure investment has been increasingly financed through off-balance constructions such as public-private partnerships or capital grants. (3)  It should be noted that DE, with a performance comparable to that of BE, has received a recommend­dation with respect to the level of (public) investment in infrastructure, education and research. (4) Reply by Minister of Mobility J. Galant to question raised by MP O. Maingain, Chambre des représentants de Belgique, 22-12-2014. 
Overall, Belgium has considerable scope
to expand the non-cost dimension of competitive­ness. This would help to balance overall macroeconomic risks. Wage
moderation will be indispensable in the short term, but it does not provide a
long-lasting strategy for a high income country. To safeguard and enhance the
welfare level reached, more emphasis will have to be put on productivity gains,
in particular those stemming from other sources than a continued capital
intensification of production processes. This requires a sustained push towards
products and associated services higher up the value chain, implying stronger
per­formance on innovation with Belgium being an average performer in terms of
innovation output.
With this aim in mind, Belgian
authorities would be well advised to introduce major policies to facilitate
this change. For instance, public innova­tion
support can be further streamlined and made more targeted. Belgium’s weak
performance in maximising the commercial benefits of R&D would profit from
a reduction in administrative barriers and, more generally, measures to unchain
entrepreneurship and unleash greater business dynamism. A timely and resolute
approach to addressing infrastructure bottlenecks would also help the country’s
overall productivity. The same applies to ensuring that labour and product
markets function well, which is discussed later.
The high level of public debt in Belgium
is a long standing structural issue. According to the European Commission's
2015 winter forecast, the consolidated public debt reached 106.4% of GDP at the
end of 2014. This is substantially above the
threshold of 60% of the Macroeconomic Imbalance Procedure and also above the
euro area aggregate (94.3% of GDP in 2014). This section discusses the recent
evolution of the public debt and its macroeconomic risks.
Public debt – recent developments
Since the start of the financial and
economic crisis in 2007, the Belgian government debt has been rising again.
However, despite massive interventions in the financial sector and a deficit
above or around 3% of GDP since 2009, the recent debt increase is less
pronounced in Belgium (BE: 20 pps. of GDP between 2007 and 2014) than in many
other Member States and the euro area as a whole (29 pps. of GDP in the euro
area on aggregate). 
 Graph 2.3.1:   Public debt (% of GDP) - Comparison between 2014 and 2015 vintage of the EC winter forecast 
 Source: European Commission 
The public debt level has been
considerably revised upward since last year's In-Depth Review, when it was
expected to stabilise at around 100% of GDP in 2014 (see Graph 2.3.1). This
revision is largely due to the reclassifications of corporations into the
general government sector, which resulted in an increase in the gross debt
level by almost 7 pps. of GDP. This is partly offset (-3.5 pps of GDP) by an
upward revision of GDP levels (the denominator) following the introduction of
the new accounting system ESA2010. The reclassified units mainly consisted of
investment vehicles of regional authorities, and thus the debt increase was
accompanied by an increase in government fixed assets.
In 2013, the general government's
primary balance had turned positive for the first time since 2008 but it is
estimated to have turned slightly negative again in 2014. A negative snowball effect continued, with interest expenditure –
although historically low – exceeding nominal GDP growth (see Graph 2.3.2).
 Graph 2.3.2:   Contributions to the change in the gross debt ratio (pps. of GDP) 
 Source: European Commission 
At unchanged policy, the gross debt
ratio is forecast to rise further in 2015, to 106.8% of GDP, and to stabilise
in 2016. This would mean that the gap with the euro
area aggregate is widening again. Current fiscal consolidation commitments, if implemented,
should ensure a steady reduction in the Belgian public debt in the coming
years. However, the reduction in the debt ratio is hampered by low inflation,
subdued GDP growth, and, in the longer term, the impact of an ageing population
(see below). A new economic downturn or financial shocks (e.g. the activation
of guarantees to the financial sector, see below), could push debt levels to
less sustainable levels. The following sections will put Belgium's high public
debt level into perspective.
Risks of short-term fiscal stress
Despite the high level of its public
debt, Belgium seems to have rapidly regained market confidence after the sudden
increase in risk premium on Belgian government bonds towards the end of 2011. The country currently enjoys relatively low financing costs (see
Graph 2.3.3). By refinancing its debt at low
rates, the Belgian sovereign has been able to drastically reduce its interest
burden, even after debt levels started to rise again.
 Graph 2.3.3:   Interest expenditure and implicit interest rate 
 (1) EA12 up to 2010, EA19 as of 2011 Source: European Commission 
Currently, Belgium does not seem to face
a risk of fiscal stress in the short term. The
average life to maturity of the federal debt portfolio (which represents
84% of Belgium's total debt) is relatively long, at 7.8 years in October 2014.
The Belgian government used the current low interest environment to refinance
the outstanding debt at low rates and pre-financed part of the 2015 financing
needs. The 12-month and 60-month refixing risk ([26]) of the federal debt decreased from 20.3% and 56.8% at the end of
2012 to 16.1% and 46.4% at the end of 2014.
 Graph 2.3.4:   Maturing debt of central government (% of total outstanding central government debt) 
 Source: Bloomberg and European Commission 
In line with developments in the euro
area as a whole, interest rates and risk premium on Belgian debt instruments
abated further in 2014 (see Graph 2.3.5). The
spread between Belgian and German bonds averaged 55 basis points in 2014,
against 84 basis points in 2013, and a high of 366 basis points on 25 November
2011. At the end of 2014, it stood at 28 basis points (see Graph 2.3.6).
Although the risk of short term fiscal
stress seem to be contained, a sustained period of higher interest rates on
government debt would have a substantial impact on Belgium's public finances. Current annual refinancing needs are estimated at over 15% of GDP
at federal level alone. Hence renewed financial market turbulence entailing
higher risk premium would rapidly increase interest expenditure. Currently,
part of the consolidation strategy is built on the assumption of falling
interest expenditure. Higher interest expenditure would have to be compensated
by a higher tax burden or expenditure cuts elsewhere which could in turn impact
economic activity. In addition, interest payments to non-residents would worsen
the primary income balance and thus weaken the country's external position.
 Graph 2.3.5:   Recent evolution of annual yields on Belgian debt instruments (%) 
 Source: IHS Global Insight 
 Graph 2.3.6:   Spread of selected government bonds vis-à-vis German bunds 
 Source: IHS Global Insight 
Increased financing costs for the
government would also pass through to the private sector, driving up financing
costs for domestic financial institutions and ultimately for non-financial
companies and households. This would have a
negative impact on investment and innovation. For instance, the cost of
mortgage loans with a floating interest rate is legally bound to the market
interest rate of Belgian bonds. The high public debt level also reduces the
capacity of public finances to face potential adverse economic shocks, and thus
increases the vulnerability of the economy as a whole.
Inter-linkages with the financial sector
Belgium still carries substantial
contingent liabilities due to guarantees granted to the financial sector,
although they have been substantially reduced since last year's In-Depth Review
and now concern only the guarantee scheme for Dexia, which is partly owned by
the Belgian state. In December 2014, outstanding
guarantees had declined to 9.4% of GDP, from 15.3% at the end of 2012. Belfius,
one of the four large banks on the Belgian market, is owned by the federal
state and the insurance company Ethias is owned by federal and regional
authorities. New capital needs of these corporations might have an adverse
impact on government gross debt levels.
The interaction between the sovereign
debt and the financial sector also plays in the opposite direction, in
particular through the substantial public debt holdings on the financial
sector's balance sheet. Holdings of Belgian bonds
by the domestic financial sector increased strongly between 2008 and 2012, at
the expense of foreign bond holdings. While this increased concentration on the
home market may have acted as a buffer at the height of the sovereign-debt
crisis, it also increased the potential spill-over effects between the public
debt and the financial sector if the market value of government bonds falls. 
The trend of increasing exposure to the
domestic public sector was reversed in 2013. At the
end of the third quarter of 2014, 50% of government bonds were held
domestically, down from a peak of 57% at the end of 2012. Likewise, Belgian
sovereign bonds represented 64.6% of euro area sovereign bonds held by Belgian
banks in December 2014, down from a peak of 72.8% in November 2012 (see Graph 2.3.7). However, the negative feedback loops
remain a source of vulnerability in case of renewed financial stress.
 Graph 2.3.7:   Share of Belgian bonds in total euro area bond holdings by Belgian banks (%) 
 Source: European Central Bank 
Medium and long term sustainability of public
finances
On top of the high public debt level,
Belgium's public finances are also projected to face a greater than average
impact from the ageing of the population. At
unchanged policy, ageing costs are projected to push up the debt level to 111%
of GDP by 2025 (see Graph 2.3.8) ([27]). A 1 pp. increase in the interest rate assumptions or 0.5 pp.
lower GDP growth would bring the debt level to 117% of GDP in 2025. On the
other hand, adequate progress towards Belgium's Medium Term Objective (which is
a surplus of the government balance in structural terms of 0.75% of GDP), as
required by the Stability and Growth Pact, would put the debt on a sustained
downward path, reaching around 80% of GDP by 2025. It should be noted that
Belgium already has a relatively high tax burden, so the fiscal space to
service a higher debt or reduce the burden through revenue-increasing measures
is limited. However, there is room to make the tax system less
growth-distorting, particularly by shifting taxes away from labour (see section
3.2).
 Graph 2.3.8:   Projections of gross debt (% of GDP) 
 Source: European Commission calculation 
The federal government is responsible
for 84% of Belgium's total public debt. The
increase in ageing costs will also occur mainly at the federal level,
particularly for pensions and health care expenditure. This contrasts with the
federal government's share of total revenue and final expenditure, which are
expected to fall below 60% from 2015. This narrowing fiscal base at federal
level may be a challenge for further fiscal consolidation and debt reduction.
The recent state reform and revision of the financing of regions and
communities partly addresses this challenge, among other things by curbing the
financial transfers from the federal to sub-federal level, and hence creating
fiscal space for the federal level at the expense of regions and communities.
On the other hand, the reform puts an additional consolidation burden on the
regions and communities, while these levels are responsible for the most growth
enhancing expenditure, such as investment in infrastructure and education.
 Graph 2.3.9:   Consolidated gross debt – breakdown between government subsectors (% of GDP) 
 Source: Belgostat and European Commission 
Lastly, the sustainability of public
debt is also determined by the economy's growth potential. Section 3.2 highlighted the current low potential growth of the
Belgian economy, especially due to a gradual erosion of the contribution of
total factor productivity since the beginning of the 1990s. The loss of
competitiveness and the inefficiencies in the labour market discussed in other
sections also make the high debt level even more problematic, as they weigh on
growth prospects, and in turn make it more difficult to put the ratio on a
downward path.
The budgetary impact of population
ageing is driven particularly by rising pension expenditure ([28]). The latest
national projections indicate that the labour force will start to shrink from
2019. This poses important economic and social challenges including to the
sustainability of public finances. As highlighted in section 3.1, Belgium has
considerable scope to further increase the effective retirement age (which is
well below the statutory age), and boost the employment rate of older workers
(55-64). Under the 2014 European Semester, Belgium was recommended to step up
efforts to reduce the gap between the effective and statutory retirement age,
bring forward the reduction in early-exit possibilities, promote active ageing
and align the retirement age with changes in life expectancy. Recently,
measures have been taken to reduce the gap between the effective and statutory
retirement age (see annex tables). The federal government also announced its
intention to increase the legal retirement age from 65 now to 66 in 2025 and 67
in 2030.  
The ageing of Belgian society challenges
the sustainability of public finances also in relation to long-term care
expenditure. In the 2012 Ageing Report, public
expenditure on long-term care was projected to more than double as a share of
GDP. The increased devolution of responsibilities to the regions and
communities still needs to yield cost-effectiveness benefits. In recent years
Belgium has expanded the availability of home care services and other forms of
community based care services. However, it still has a relatively high capacity
of long-term care beds. 
Cooperation remains a challenge
especially following the fragmentation of responsibilities between different
levels of government. The use of the Belgium
Resident Assessment Instrument for measuring and monitoring quality is a
step in the right direction. A stronger focus on prevention and rehabilitation
policies, improved conditions for independent living, a further shift away from
institutional care and stronger care coordination between the different actors
would be useful for increasing cost-effectiveness and limiting future needs and
their related costs. Flanders has announced a reform to better integrate
services and benefits.
Public debt and overall financial situation
of the Belgian economy
The net financial asset position of the
Belgian economy is highly positive (+42.5% of GDP in 2013), and compares with a
net debtor position of 10% of GDP for the euro area as a whole. This healthy overall position is mainly thanks to the very high net
assets of Belgian households (224% of GDP, against 139% in the euro area),
which more than offset the net liabilities of the public sector and the
non-financial corporations (see Graph 2.3.10). The financial situation of
households is discussed in the next section.
 Graph 2.3.10: Net financial assets/liabilities by sector (ESA2010) 
 Source: European Commission 
The net liabilities of non-financial
corporations (at 80% of GDP) are below the euro area aggregate (95% of GDP). This figure hides a relatively high indebtedness among
non-financial corporations, which is however partly offset by sizeable assets.
In previous editions of the In-Depth Review on Belgium, the high indebtedness
of Belgian corporations has been explained by a high amount of intercompany
loans between intra-group financing centres (non-financial holdings) and
subsidiaries of the same group. This feature is brought about by the rather
unique system of notional interest deduction (allowance for corporate equity)
in the Belgian corporate income taxation system. Consequently, the debt figure
stood substantially lower after sector consolidation. As argued in the 2014
edition of the In-Depth Review on Belgium, the consolidated debt figure also
still includes substantial intra-group lending, notably cross-border lending,
which does not constitute a macroeconomic risk.
 Graph 2.3.11: Debt of non-financial corporations (% of GDP): BE versus EA, ESA95 versus ESA2010 
 Source: European Commission 
The changeover from ESA95 to ESA2010
statistical rules brought substantial changes to the debt ratio of
non-financial corporations (see Graph 2.3.11).
Henceforth, non-financial holdings and treasury centres, which accounted for a
large share of intra-group lending, are classified in the financial sector
instead of the non-financial corporations sector. Consequently, the
non-consolidated debt ratio of the latter is substantially lower under ESA2010
(139% of GDP in 2012, against 193% under ESA95), and closer to the euro area
aggregate (97% of GDP in both ESA95 and ESA2010). On the other hand, the
consolidated debt ratio of non-financial corporations is now higher, because
the consolidation no longer nets out lending and borrowing between subsidiaries
and intra-group financing centres. These statistical changes confirm the
previous assessment that the apparently high indebtedness of non-financial
corporations can be explained by the presence of intra-group financing centres
and do not point to sustainability risks. 
All in all, while public debt in Belgium
remains high and continues to increase, several factors temper associated
macro-economic risks, in particular the relatively healthy situation of the
private sector. Risks of short term fiscal stress
are considered low, and inter-linkages with the financial sector are
diminishing. Moreover, the economy as a whole is in a highly positive net asset
position, which provides a buffer in case of shocks.
This being said, Belgium's high public
debt level is particularly challenging from a public finance perspective. Current efforts to reduce the debt ratio are hampered by low
inflation and subdued GDP growth. Interest expenditure, although historically
low, still puts a substantial burden on the budget, especially at federal
level. Further consolidation efforts are needed, especially in the light of
rising social expenditure due to an ageing population. A successful
consolidation strategy would thus also require swift implementation of the
pension reforms announced, as well as growth-enhancing structural reforms. 
In a letter sent to the Commission in
November 2014, the Belgian authorities committed to a number of structural
reforms implementing the country-specific recommendations issued by the Council
in July 2014. These structural reforms were further
detailed in two reports sent on 30 January and 5 February 2015 (updated on 13
February). The announced reforms are substantial and are expected to contribute
to boosting the economy's growth potential and reducing the risks of
macro-economic imbalances, thereby having a positive impact on debt
sustainability. In this respect, the swift implementation of the ongoing
structural reform agenda forms a necessary part of a credible debt reduction
strategy.
As in many other European countries,
property prices in Belgium rose appreciably in the years up to the crisis. As a
result, banks expanded their portfolios of residential mortgage loans, at a
pace largely exceeding nominal GDP growth. The rise in mortgage indebtedness
has been accompanied by an increase in the vulnerability of the household
sector. To identify unsustainable developments in housing markets, as well as
in household indebted­ness, the sections that follow
give an overview of indicators reflecting past changes and provide information on the household debt
burden and on the over- or undervaluation of
residential housing prices. 
Evolution of property prices and explanatory
factors
Property prices have risen by 110% in
real terms since 2000. The increase has been
broadly based across different regions and dwelling categories. In a long cycle
starting in 1985, house prices cumulated a growth of 209% from trough to the
2010 peak, accelerating from 2005 on. Since the crisis, house prices have
followed the course of the economy. In years when the economy performed better,
nominal house prices rose. When the economy was weak, they stagnated. Yet, real
housing prices have broadly stabilised in recent years (see Graph 2.4.1).
 Graph 2.4.1:   Evolution of house price index and loans for house purchase 
 Source: ECB, European Commission 
Unlike in many European countries, where
house price increases were followed by a severe correction, the housing market
in Belgium has stood up well to the financial crisis. Only France experienced a similar trend, as seen in Graph 2.4.2.
 Graph 2.4.2:   Real house price index — selected countries 
   
 Source: OECD, BIS, European Commission calculations 
In Belgium, the price responsiveness of
new housing supply has been very low ([29]) (see Graph 2.4.3). In the long term, the housing supply
is structurally constrained by a scarcity of land and a dense population. This
is particularly the case in Flanders, where the average size of land sold for
construction shrunk significantly to keep up with the growth in demand and the
steep increase in the price of building plots. The rigidity of supply may also
stem from strict urban and environmental planning and land use regulations.
More recently, housing construction has also suffered from the general slowdown
in growth. Consequently, higher housing prices did not go hand in hand with an
increase in residential investment, which remained stable over the years until
2003. While real residential property prices rose by 92% since 1995, new
housing investment grew by only 18% over the same period. However, residential
construction is now increasing again, following a contraction in 2012-13. In
January 2014, the total number of dwelling permits issued rose by 32.7% from a
year earlier to 5 000 permits, based on latest figures from the National
Bank.
 Graph 2.4.3:   Price responsiveness of housing supply 
 Source: OECD estimates 
Belgium has seen a population increase
and an even more rapid rise in new households which has driven up demand for
housing. About three quarters of the population
increase is attributable to a pronounced rise in the net external migration
balance, peaking in 2010. The number of households has increased, due to the
fall in family size, which is the result of the increase in the number of
one-parent families, ageing, and a decrease in the number of children per
household.
In addition to fundamental changes
affecting demand and supply, the housing market is influenced by various other
factors, most importantly housing policy, lending practices and more easily
available financing. These legal and regulatory
factors have also made it easier to acquire and renovate property in the last
10 years, thereby boosting the number of transactions and prices. In
particular, the favourable tax treatment of home ownership, subsidies and,
atypically, a trend towards higher rates of down-payment contributed to the
rise in house prices in the decade before the economic crisis.
In 2005, the system of tax benefits to
encourage owner-occupation was thoroughly revised.
The tax allow­ance for capital and interest payments on mortgage loans was
abolished and replaced by the ‘housing bonus’, a marginal tax rate reduction,
implying even higher advantages per dwelling than before. The regions also
fully exploited their tax competences. Apart from introducing several
deductions on the federal real estate income tax, they also cut registration
duties (transfer tax) (in Flanders in 2002, in Brussels in 2003 and in Wallonia
in 2009). In Flanders, this reduction was accompanied by transferability of
earlier paid registration duties, encouraging (young) house­holds to invest in
their first home comparatively early on, and to buy a larger home later as
their income grows.
A very specific federal government
measure was the 2005 tax amnesty, known as the 'one-off declaration in full
discharge', encouraging Belgian households to repatriate money from abroad. Part of this was certainly reinvested in residential property, as
illustrated by tangible increases in down-payments on property purchases from
2005 as well as a fall in the loan-to-value ratio (see below). The tax amnesty
expired at the end of 2013. There was also a whole raft of subsi­dies for
energy-saving measures, such as ‘green loans’, which encouraged purchase and
renovation projects, as well as mortgage loans for renovation. However, these
measures have been scaled back significantly since the beginning of 2012.
The decline in interest rates in recent
years has reduced the cost of ownership, making it more affordable to buy a
house, and consequently has supported price rises.
Due to a highly accommo­dating monetary policy and excess savings in the
emerging Asian economies and oil-exporting countries interest rates declined.
Other supportive demand factors that have determined house prices include lower
and less volatile inflation, a fall in equity yields and a steady increase in
disposable income.
The developments on the mortgage markets
over the past decade led, among other things, and contrary to many other countries,
to a decrease in the loan-to-value ratio. Up to
2005, rising property prices also caused a sharp increase in the average amount
of new mortgage loans and borrowers’ associated burden (see Graph 2.4.4). From 2005 on, the use of own funds
to finance residential projects increased and the aggregate loan-to-value ratio
on new mortgage loans declined (from 77% in 2005 to 61% in 2013). In other
words, the personal contribution towards a house purchase has increased from
23% in the mid-2000s to 39% in recent years. One of the reasons for this trend,
as already mentioned above, is the repatriation of funds under the 2005 tax
amnesty. Part of these funds were reinvested in residential property,
especially in the higher end of the real estate market. Another factor is the
‘housing bonus’ introduced in 2005, which might have incited households to take
out a mortgage loan for tax reasons, rather than for lack of self-funding
capacity (limiting the amount borrowed to the level taken into account in the
tax return). Finally, greater flexibility and a lower tax rate for gifts and
donations might have stimulated additio­nal transfers of money between
generations for home purchases. However, insofar as the same factors that are
responsible for the fall in the average loan-to-value also drive up property
prices, buyers who are more constrained in terms of their own capital still
have to borrow large amounts. Around one third of new production volumes in
2013 still had a loan-to-value ratio of more than 90%. At the end of 2013,
around one sixth of the outstanding amount of loans had an indexed
loan-to-value ratio of more than 90% ([30]).
There has been a trend towards longer
loan maturities. The average loan term in Belgium
was traditionally estimated at 20 years, but data from the Central Individual
Credit Register suggest that the share of loans with a maturity of more than 20
years at origination surged from 33.5% of the outstanding stock in 2007 to
44.2% in 2014. Clearly the increase in borrowing capacity generated by lower
interest rates was not sufficient for some borrowers to offset the increase in
property prices. Alternatively, some borrowers may deliberately have increased
maturities in order to fiscally optimise the amortisation process. However,
banks have become more selective in their credit origination policies since
2012, and a reduced prevalence of longer maturities (especially 25 years and
over) in new mortgage loan production can be clearly seen since 2011. Many
mortgagees refinance their loans to take advantage of the extremely low
interest rates 
 Graph 2.4.4:   Developments in the average amount of new mortgage loans and aggregate loan-to-value ratio (in EUR 1 000) 
 Source: NBB 
Lastly, the financial crisis and
associated heavy losses on financial investments may have incited households to
convert financial assets into property and real estate funds from 2008 onwards. This helps explain why, unlike in most other European countries,
the downturn that began in 2008 has also, paradoxically, tended to support
property prices in Belgium, in spite of the still challenging circumstances
during the euro area sovereign-debt crisis.
Evolution of household debt
The marked increase in property prices
resulted in an increasing number of loan-financed property transactions. Consequently, like in the euro area, Belgian household debt
accelerated from 2000 onwards, both in absolute terms and in relation to GDP.
In nominal terms, Belgian household debt has doubled in the past 10 years to
reach EUR 241 billion mid-2014. The household debt ratio was up from 40%
to 60% of GDP at the end of 2014 (see Graph 2.4.5). Despite this upward trend, however,
both the level and the increase are rather modest compared with the euro area
average, which posts a debt-to-GDP ratio of 63.7% of GDP.
 Graph 2.4.5:   Household debt 
 Source: NBB 
An unsustainably rising debt ratio may
have a significant impact on the economy at aggregate level, both in terms of
real growth and also for financial stability as
large numbers of households could default. Average risk weights calculated by
Belgian banks are very low (10%), also in comparison with the EU average (16%).
This is because there has been no major crisis in the property market and
default rates have been very low, albeit increasing since 2008 ([31]) (see Graph 2.4.6). More than 90% of total residential
mortgage lending by banks is carried out by banks under Belgian law that apply
the internal ratings-based approach. However, there is considerable
heterogeneity among these banks, with the share of lending for house purchases
in total assets ranging from 12% to 50% ([32]). Moreover, risk weights as calculated by the internal
ratings-based models may be too low for losses that may emerge in less
favourable market conditions. Therefore, at the end of 2013, the National Bank
of Belgium took precautionary macro- and micro-prudential measures to improve
banks’ resilience to potentially adverse macroeconomic shocks. The most
important measure is a 5 percentage point add-on to the risk weights calculated
for banks using the internal ratings-based model.
 Graph 2.4.6:   Non-performing loans 
 Source: European Commission 
Indicators reflecting the ability of
households to repay their outstanding debt relate the debt level to the
resources available to the borrowers, i.e. assets and disposable income.
Although the ratio of debt-to-financial
assets ([33]) was up,
it reflects that, on average, there are sufficient assets to cover the
liabilities. The ratio rose from 12.5% in 2001 to
20% in 2014 (see Graph 2.4.7), but is still low compared with the euro area.
This is thanks to the lower debt ratio of Belgian households, but above all to
their extremely favourable wealth position (both financial and non-financial
assets). At the end of the third quarter of 2014 Belgian households’ financial
assets amounted to EUR 1 146.6 billion, equivalent to 292% of GDP
(against 218% in the euro area), the highest in the euro area and an all-time
Belgian record, according to figures from the National Bank. Apart from a
considerable inflow of new savings, financial assets also grew thanks to the
strong performance of investment funds. Once other assets are included, mainly
real estate wealth (which the National Bank estimates at over EUR
1 000 billion), total wealth is much higher, at over five times
GDP.
Linking debt to income reveals a ratio
of 90% at the beginning of 2014, which is still below that of the euro area. In the past decade, households’ debt increased significantly more
than their gross disposable income, and thus the ratio between the two figures
rose from 59% in 2001 to 90% in 2012 (see Graph 2.4.7).
 Graph 2.4.7:   Household debt indicators 
 Source: ECB, European Commission 
The sustainability analysis shows that
the Belgian household sector does not face any immediate problems and does not
need deleveraging. Robust household balance sheets,
relatively low loan-to-value ratios, and the prevalence of long loan maturities
and fixed interest rate mortgages should limit the impact of interest rate or
unemployment shocks on the quality of the mortgage portfolio. However, these
indicators are calculated for the entire household sector, and not just for
indebted households. Also, they do not reveal anything about the distribution
of debt in relation to assets or income within the population. Therefore, the
sustainability of household debt also needs to be assessed from a microeconomic
point of view.
The above macroeconomic view is borne
out by the microeconomic analysis conducted on the basis of the ECB's Household
Finance and Consump­tion Survey. International
comparison based on the survey data (see Table 2.4.1) ([34]) shows that the debt-to-asset ratio for a median income household
is relatively low in Belgium (18%) compared with the euro area (22%). The
position is somewhat less benign concerning the debt-to-income ratio, where the
median indebted household has a debt-to-income ratio of 80%, against a
conditional median value of 62% in the euro area. Equally, it appears that the
median indebted Belgian household has, after a steady rise over the past
decade, a slightly higher debt-service-to-income ratio than the equivalent household
in the euro area (14% against 11%). This increase is not necessarily a sign of
financial difficulty, because lower mortgage interest rates and longer loan
terms have limited the debt repayment burden. In fact, a breakdown of the cost
shows that the increase is due mainly to higher capital repayments. 
Unsurprisingly, these data also reveal
that, among those households with an outstanding mortgage loan, it is the
youngest cohort (aged below 35) and/or low-income households who face the
highest liquidity and/or solvency risks. The
debt-to-asset ratio is lower in Belgium for all  income groups, given the high
value of Belgian households’ assets and the more even distribution of those
assets (notably property) among the population. Regarding the age cohorts, only
around 20% of indebted households in the youngest age group in Belgium have a
debt-to-assets ratio of more than 0.75, compared with only 31.9% in the euro
area. In fact, in Belgium, 46.4% of young households own a property, which has
to be taken into account when assessing their debt sustainability. By contrast,
in the case of the debt-to-income ratio, there are more households with a
higher risk in Belgium than in the euro area. However, within the lowest-income
(young) households group, only a quarter of them make use of the credit market
(see Graph 2.4.8), and this is often in the form of small loans, so that total
amounts involved do not seem to represent a serious macroeconomic risk.
Conversely, the youngest households in the highest income quintiles are much
more inclined to borrow, being typically those with the largest outstanding
debt, but with an inherently lower risk of default. These young households may
have favourable future income prospects or access to other resources for
repaying their debt (such as help from their family), so they can afford a
heavier debt in relation to their current income. 
 Table 2.4.1:     Financial burden indicators — median ratios (in %) 
 (1) Standard errors are shown in grey below their corresponding figure. Source: Eurosystem Household Finance and Consumption Survey 
 Graph 2.4.8:   Percentage of households holding debt by income 
 Source: Eurosystem Household Finance and Consumption Survey 
Excessive debt generally implies that
both the liquidity and the solvency of households are affected. In other words, households considered to be in difficulty are those
whose debt is not fully covered by assets and which, after liquidating their
assets, are still unable to repay their debt. Thus, a household with weak
solvency may never encounter problems if it can bow on sufficiently large,
permanent and secure income flows. Conversely, a household with a high
debt-to-income ratio may be unable to meet its commitments from its current
income, but does not have a debt problem if it can free up semi-liquid assets
or sell assets to pay off the debt. 
First, interest rate and/or unemployment
shocks would essentially affect the debt-service-to-income ratio. Mortgage loan portfolios are dominated by loans for which the
interest rate is fixed for the whole term of the contract ([35]), which reduces the sensitivity of instalments to interest rate
fluctuations in comparison with variable interest rates. For the quality of the
Belgian mortgage loan portfolio, a surge in unemployment is a bigger risk, as
some borrowers in recent years may have stretched their mortgage loan
maturities, loan sizes or debt service ratios to levels that could potentially
entail a higher risk of future credit losses for banks than in the past.
Households with relatively high volatility in their income or insufficient
reserves of liquid assets are the most sensitive to recessions or other
situations involving loss of income.
The general economic outlook, and hence
the outlook for unemployment and household disposable income has improved. However, the economy is set to accelerate just moderately in
upcoming years, reaching 1.1% in 2015 and 1.4% in 2016. Household disposable
income growth is likely to remain moderate (see section 1). 
Second, a fall in property prices would
primarily affect the debt-to-asset-ratio and put the solvency buffer under
strain. Although lower housing prices in themselves
will not affect people’s ability to repay their mortgages, a turnaround in the
housing market could thus be detrimental to the wealth position of households,
especially if it is accompanied by income shocks in the group with the highest
potential risk of encountering debt problems. In this case, the riskier loan
segments in the outstanding stock of mortgages could be the source of
higher-than-expected credit losses for banks.
Assessing house prices
In order to gauge the sustainability of
the Belgian housing market this section looks at
indicators that appropriately reflect past dynamics and
provide information on over- or undervaluation. Large under- or overvaluations can be
interpreted as a signal of potential upward or downward pressures on house
prices.
 Graph 2.4.9:   Price-to-rent and price-to-income ratio 
 Source: European Commission, OECD, ECB and BIS 
Valuation estimates based on
price-to-income (affordability gap) and price-to-rent ratios (dividend gap)
suggest a very high overvaluation in Belgium versus the long-term average, hovering on average around 30% (see Graph 2.4.9). A priori, this
could be a reason to expect a price correction in the future as, in theory,
these ratios tend to revert to their long-term average. However, mean-reversion
properties are not confirmed by empirical evidence in several countries. The
equilibrium value is usually approximated as the long‑term average of the
indicators. However, that average value depends on the period considered (which
is often too short due to lack of historical data) and there is no guarantee
that the equilibrium value will be constant over time, because of changes in
factors such as property taxation and the operation of the mortgage market.
Moreover, these figures may not fully reflect shifts in other fundamentals.
These include demography, the preferences of economic agents, the
characteristics of the property, the tax rules applicable (for example, the
deductibility of borrowing costs, which supports the affordability of housing),
mortgage contract characteristics (loan‑to‑value ratio and
maturity) which prove to be relatively sound in Belgium, rents ([36]) and fluctuations in mortgage interest rates.  Just by adjusting
the ratio between house prices and disposable income for the interest rate and
population growth, the overvaluation of house prices drops to 15%, as
illustrated by the interest-adjusted affordability ratio of the National Bank ([37]).
The question also arises whether these
measures of housing price valuation may reflect subdued rentals in Belgium,
rather than excessive increase in house prices.
Apart from Germany, rental increases in Belgium since 1997 were the lowest
within the euro area (see Graph 2.4.10). The unequal distribution of
subsidies (mainly directed towards home ownership), low profitability and
substantive risk related to putting a property on the rental market, have led
the private rental sector to an historical low for Belgium, at about 30% of the
housing stock (23% in the private sector, 7% in social housing), down from 38%
in 1980 and 33% in 1990. The relatively small scale of the rental market,
coupled with its two-tier character (with differences in rentals between the
private and social rental market), also limits the relevance of the price‑to‑rent
ratio for Belgium.
 Graph 2.4.10: Increase in rentals and % of tenants 
 Source: European Commission 
Moreover, the size of households’
financial assets has probably played a greater role than income in determining
house prices in recent years. The transfer from
financial assets to property was encouraged through the transfer from one
generation to another: the acceleration in price increases since 2005 prompted
households to use more of their own resources to fund their purchase so as to
avoid taking out an overly large debt. From 2009 on, the disappointing
performance of some of the financial investments and fears the crisis would
worsen also encouraged the shift from financial assets to property. 
In fact, more detailed assessments point
to a more moderate result which, depending on the specifications, fluctuates
between slight over- and undervaluation. Indicators
based on econometric techniques point to a moderate result which, depending on
the specifications, fluctuates between slight over- and undervaluation. The
European Commission’s estimates point to a slight overvaluation of 0.5% in 2014
(see Graph 2.4.11). This reflects the deviation in
house prices from the equilibrium value justified by housing demand (income,
demographic pressures, mortgage interest rates) and/or supply fundamentals
(existing stock of housing, building permits, unsold houses, land availability
or construction costs) ([38]).
 Graph 2.4.11: Overvaluation gap with respect to main supply and demand fundamentals 
   
 * 2014 preliminary estimation. Source: European Commission 
Credit market conditions need to be
factored in as well. Short-term price changes are
largely determined by households’ ability to finance assets through external
funds, independently from house valuation levels. Graph 2.4.12 shows the
percentage of households who applied for credit during the period 2007-10,
those who were denied credit or were offered a smaller amount than they applied
for, and those not applying for credit due to a perceived credit constraint.
Credit constraints have been low, compared to other European countries. According
to ECB data, the national monetary financial institutions' interest rate for
house purchase (at floating rate and up to 1 year initial rate fixation)
decreased from 6.02% in October 2008 to 2.63% in December 2014.
Moreover, price levels remain moderate
compared with other Member States and affordability is still reasonable, taking into account other fundamentals besides incomes and rentals,
such as the interest rate, the length of mortgage terms and loan-to-value
ratios. Belgians do not pay unusually high prices for homes compared with
people in other European countries, especially if differences in the quality of
the accommodation are also taken into account. In fact, according to Eurostat
data, Belgium scores highly on the physical quality and comfort (e.g. living
space) of its houses. Graph 2.4.13 illustrates the relative price differences
for a 120 m² apartment in the capital. 
 Graph 2.4.12: Credit constraints (2010) 
 Source: Eurosystem Household Finance and Consumption Survey. 
 Graph 2.4.13: Average price/m² of a 120 m² apartment located in the capital (in EUR, end 2012) 
 Source: Global Property Guide 
In sum, housing prices in Belgium do not
seem to be substantially over- or undervalued.
However, the Belgian housing market seems to be characterised by an increasing
divide between people who can afford to buy property because they have their
own funds to do so and those for whom housing has become less affordable. The
latter need increasingly large mortgage loans to become homeowners (putting
upward pressure on their debt service burden), or will increasingly find their
way to the rental market. 
A number of factors militate against a
housing price decline and can be expected to continue to underpin prices in the
medium term.
Interest rates are one of the most
important factors affecting the residential property market. Once the extreme easing of monetary conditions ends, a return to
more normal monetary policies and real interest rates is likely. This will
naturally have a dampening impact on the recourse to mortgages and could
restrain investment compared to the pre-crisis period. That effect could be
exacerbated if banks consider tightening their lending criteria (duration of
the loan, loan-to-value ratio, collateral required), thereby limiting the
supply of credit.
Gross household debt is moderate and
below the euro area average. It is therefore
unlikely to drag significantly on housing prices, given that Belgian households
are not (yet) deleveraging. Furthermore, the build-up in household debt is also
largely offset by an accumulation of financial assets; net financial incomes,
even if already at an all-time high, are set to continue improving.
Government policies tend to prevent real
estate prices from falling. Although the effect of
temporary factors, such as subsidies for renovation and building, has faded,
house prices have not come under downward pressure hitherto. However, home
buyers and owners might turn out to be more sensitive to tax policies. Changes
in the tax regime for mortgage loans (as recently in Flanders), for which
legislative powers have been transferred from the federal government to the
regional authorities as part of the sixth state reform, may lead to changes in
the incentives for households to finance real estate transactions with mortgage
loans. Similarly, an increase in, or harmonisation of, residential property
taxes by updating the cadastral incomes might be envisaged, especially in a
context of long-term fiscal consolidation. A clear advantage of making
cadastral values more representative of underlying property values would be
that it addresses disincentives for renovations (given that these are
automatically coupled to an update of the cadastral income) and would tilt tax
revenues towards recurrent taxes (and would make them fairer). Yet, an update
of the cadastral income might also raise the taxable rental income on non-owner
occupied housing, thereby diminishing yields on rental property, and
potentially giving rise to an even lower rental supply and/or to it being
passed on into rents. Any reform for tax purposes should therefore carefully be
considered against the background of (rental) housing market policies.
 Graph 2.4.14: Demographic evolution per age cohort 2000-2060 (thousands of people) 
 Source: Federal Planning Bureau 
Finally, according to the Federal
Planning Bureau’s demographic outlook, the average rise in the total population
over the next 10 years will be higher (at 0.64% per
year) than in the previous 15 years (0.45% per year). The population group aged
between 25 and 44 years, more representative of potential property buyers,
contracted during the past decade but will broadly remain constant from 2014 on
(see Graph 2.4.14). The number of households will also
continue to grow more strongly than the population in general, in view of the
structural trend towards a reduction in household size.
All in all, the risk of a sharp
correction in real estate prices appears contained.
Price adjustments can be expected to be gradual. The buoyant conditions in the
Belgian housing market have not been accompanied by a surge in house-building.
Moreover, robust household balance sheets and high ownership rates, coupled
with persistent housing shortages, are likely to prevent a rapid price decline.
If house prices fall, sound lending standards should limit the impact on banks.
Labour market
Structural problems characterising the
Belgian labour market continue to result in a chronic underutilisation of
labour. As shown in Graph 3.1.1, the Belgian aggregate employment and
activity rates have remained largely stagnant since the beginning of the
century, at levels below the euro area averages.
 Graph 3.1.1:   Employment and activity rate (%, 20-64y) 
   
 note: EA and EU averages are comparable Source: European Commission 
The unemployment rate of 8.4% at the end
of 2014 stands below the EU average, while the
share of the long-term unemployment as a percentage of the active population has
slightly increased since the outbreak of the crisis, from 3.5% in 2008 to 4.1%
in 2013 (increase from 3.0% to 5.1% in the EU). The incidence of long-term
unemployment over total unemployment remains high (at 50% for both Belgium and
the EU average in the third quarter of 2014, from respectively 49% and 39% in
2008), especially among older workers i.e. 55-64 years (70% in 2014 against 63%
in the EU). 
As depicted in Graph 3.1.2 the Belgian
labour market is characterised by major differences between regions. Flanders outperforms Wallonia and Brussels both in terms of
employment and unemployment rates. The situation in Brussels is particularly
worrying. At 19.2% in 2013, its unemployment rate stands at twice that of
Wallonia (11.3%) and four times above the rate in Flanders (5%). Wallonia and
Brussels also have persistently high long-term unemployment, amounting to 56.6%
and 51.5% of total unemployment in 2013, respectively. This compares with 32.5%
in Flanders.
 Graph 3.1.2:   Regional employment and unemployment rates (%, total labour population) 
   
 Source: European Commission 
The chronic underutilisation of labour
in Belgium is rooted in a number of structural factors affecting both the
demand and the supply side of the labour market, as well as the match between
demand and supply. The next sections therefore
discuss (1) labour taxation and job creation, (2) interactions between the tax
and benefit system and its impact on financial incentives to work, and (3)
mismatches hampering the efficient allocation of resources in the labour
market. The impact of these structural factors on specific groups in the labour
market such as young and elderly unemployed people and those with a migrant
background is illustrated in the last section. 
Additional elements, not detailed in the
analysis below, should also be kept in mind. In
particular, in case of collective dismissals, Belgian labour law imposes a
large number of additional information and consultation requirements compared
to other OECD countries, as well as comparatively sizeable severance pay
top-ups ([39]), although a
recent reform to harmonise dismissal procedures for blue and white collar
workers should significantly lower the collective dismissal costs borne by the
employer. This, coupled with rather generous short-time working schemes,
hinders an efficient reallocation from the labour demand side ([40]), while steep seniority-based wage scales, severance pay top-ups and
a wage setting system leaving limited room for wage differentiation across
industries may reduce the attractiveness of job mobility (on wage setting see
section 2.1).
Labour taxation
and job creation
Taxes on labour are among the highest in
the EU for virtually all standard household types and earning levels. The difference between total wage costs (including social security
contribu­tions) and take-home pay increases with earnings (see Table 3.1.1).
For singles without children, the difference between total wage costs and
take-home pay ranges between 7.9 and 14.7 percentage points above the EU
average, depending on the earning level. For one- and two-earner couples with
two children earning the average wage, the difference between the Belgian and
the EU average tax wedge is of the same order of magnitude.
 Table 3.1.1:     Tax wedge 
 Source: European Commission, OECD Tax and Benefit Model. 
By pushing up labour costs, the high tax
wedge contributes to low employment creation in periods of slow growth. It even risks triggering job destruction, especially in industries
in which nominal wage changes have outpaced productivity developments in recent
years (see section 2.1). Recent national data indeed show a slowdown in gross
job creation throughout the country over the period 2008-13, with manufacturing
and construction being hit particularly hard ([41]).
Belgium has traditionally relied on
various types of wage subsidies to reduce the tax burden on labour for specific
industries or types of companies. These take many
forms, ranging from structural reductions of employer social contributions to
sector-specific exemptions of (part of) the withholding tax and subsidies to
stimulate employment of specific target groups. As discussed in section 2.1,
the new federal government has maintained planned reductions, though with an
altered timing. Meanwhile, competence for granting targeted reductions in
social security contributions to stimulate the hiring of people from specific groups
has been trans­ferred to the regional level under the sixth state reform. All
three regional governments committed to seize this opportunity to assess and
streamline the current federal schemes to ensure appropriate targeting and
maximum effectiveness (see below).
However, the fact that contributions on
the lowest wages are already close to zero shows the limits of a strategy
consisting of decreasing the tax wedge through ad hoc measures. Moreover, although the planned structural and targeted wage cost reductions
are set to alleviate the overall tax burden on labour somewhat, the
various wage subsidies and social security reduction schemes coexist with high
nominal rates. This results in the perception that Belgium has a high tax
burden and makes the system hard to decipher for investors. In this context, a
fundamental overhaul of the existing tax system, including a budgetary-neutral
shift away from taxes on labour to other less employ­ment and growth-distorting
taxes, constitutes a more promising route.
Financial
disincentives to work
In interaction with the benefits system,
high labour taxation also has negative supply-side consequences, as it might lower the financial incentive to move from
unemployment or inactivity to work. A standard methodology to assess the
financial incentives to take up work has been developed by the OECD ([42]).
Compared to the EU average, unemployment
traps in Belgium (calculated at the beginning of the unemployment spell) are
comparatively large for single people and single parents earning between half
and two thirds of the average wage (see Graph
3.1.3). Moreover, unemployment traps for the second earner within two-earner
households also generally exceed the average, except for childless families
situated at the very low end of the wage distribution. For one-earner
households at the lower end of the wage distribution, unemployment traps in
Belgium are generally below EU average. 
 Graph 3.1.3:   Unemployment trap (when taking up work at previous wage level, 2013) 
 Source: OECD Tax Benefit indicators database. The bars indicate the part of the additional gross wage taken away in the form of increase taxes and withdrawn benefits. 
These findings about unemployment traps
are consistent with the results of earlier studies from the Belgian Central
Economic Council (CEC) ([43]). These measure the financial incentives to take up employment at
previous salary levels, in terms of total additional disposable income after an
unemployment spell of a given duration. Based on the legislation in force in
2010, additional disposable income increases ranged between 30% to over 100% of
the income during the unemploy­ment spell, with the exception of singles receiving
maximum benefits and returning to work at low wages, and single parents. For
the latter, the added disposable income remained well below 30% even in case of
return to the labour market at moderate wages (between 150% and 180% of the
minimum wage) after a long unemployment spell. This is to a large extent
explainable by their less favourable tax treatment compared to cohabitant
or married couples, and a different fiscal regime to bring into account the
persons at charge. 
In 2012 Belgium has enacted a reform of
the unemployment benefit to strengthen financial incentives to work. The system of decreasing unemployment benefits over time was
extended to new types of households, and this decrease was made steeper.
Exemptions were made for unemployed suffering from a disability, for those
older than 50, and those who have made social contributions for over 20 years,
which will be progressively increased to 25 in 2017. Subsequent measures to
further reduce unemployment traps include targeted interventions to increase
the net take-home pay for low wage earners (through successive rounds of
increases of the so-called 'work bonus'), a linear reduction of personal income
taxes (through an increase of the ceiling for professional cost deductions) and
a number of parametric changes to calculation methods to further reduce benefit
levels, most notably of the older and part-time unemployed. In parallel, job
search requirements for the unemployed have been tightened and enforcement of
rules strengthened. 
 Box 3.1.1: Net increase in disposable income when entering into work Note: 2C: two children; MW: median wage; 67: 67% of median wage; 100: 100% of median wage Source: European Commission, based on OECD Tax-Benefit models The above graphs illustrate the net increase in disposable income from entering into work at the same wage level earned before unemployment for different durations of the unemployment spell (from 1 to 60 months). The types of households chosen (single earner, single parent with two children, and second earner or 'cohabitant' in a couple) illustrate three possible situations for which different rules apply. The contribution histories at 2, 10 and 20 years (the latter both under the new rules and if exempted) are chosen to illustrate the impact on the unemployment trap of the steeper decrease of benefits over time. The earning levels are those of a full-time worker paid, respectively, at the minimum wage, the average wage, and two thirds of the average wage. The chosen household and earning situations are not representative of the general population in a statistical sense. However, it is more appropriate to focus on the lower part of the wage distribution, as disincentives are higher at low wage levels, and because the majority of unemployed workers fall into this bandwidth of earnings. 
 (Continued on the next page) 
 Box (continued) 
 In general, the proportional gain in disposable income increases with the level of earnings. A notable exception is the case of single earners earning two thirds of the average wage, with a lower proportional increase, during the first year of unemployment, than that of singles working at the minimum wage level, due to the progressivity of the tax system. Increases over time are particularly gradual in the case of long careers (>20y), which were exempted from the 2012 reform. As for single parents, the decline in additional disposable income over time observed in some cases is the result of supplementary family benefits which are granted after six months of unemployment. The low proportional increase in net income for second earners during the first year of unemployment also reflects the fact that incomes earned (and taxes paid) by the principal-earner spouse (assumed to be working at the average wage) are considered as well. 
Nevertheless, the Belgian tax and
benefit system continues to create comparatively sizeable unemployment traps,
depending on the prior contribution history and earnings of the individual
concerned, as well as the household type and wage level after re-entry (see Box
3.1.1). While not all of the enacted reforms are
visible in the latest available data (2013), some interesting observations can
be made with regard to their impact on financial incentives to work. Box 3.1.1
shows that the increase in net disposable income when returning to the labour
market varies considerably. The comparatively low proportional increases in net
income for second earners also reflect the fact that the marital quotient ([44]) is nulli­fied when the second partner starts to earn more than 30%
of the total earned income of the couple. In this sense, this tax advantage for
cohabitant or married couples adds to the unemployment trap. 
The overall complexity of the system
also hampers efforts of getting people back to work. Given the highly personalised time profiles of benefit levels,
there is a risk that benefit recipients themselves are insufficiently aware of
how their own situation will evolve over time. 
Labour shortages
and qualification mismatch
Belgium also faces labour shortages. Although unemployment has been increasing since the start of the
crisis, job vacancy rates are among the highest in the EU and job offers for
critical occupations take longer to fill than the average. Employers have a
hard time finding workers for these occupations due to the scarcity of
applicants, qualitative requirements (qualifications, expe­rience, languages
spoken) or difficult working conditions.
Although horizontal mismatches exist,
qualifi­cation mismatches are mostly vertical ([45]). The skills mismatch is mainly related to a greater supply of
low-skilled job-seekers than employers need and an under-representation of
highly-skilled job-seekers. More than 80% of the active population with
tertiary education is employed, against 65% for medium-skilled persons and less
than 40% for the low-skilled. This is below the EU average for all three
groups, but the gap is especially wide for the low-skilled. As regards horizontal
mismatches, these mostly relate to skills shortages for technical and
future-oriented occupations observed at all levels of education. The number of
graduates in science, technology, engineering and mathematics remains low.
Transition from school to work is particularly difficult for young people
leaving education with low qualifications (see below).
The mismatch between labour supply and
demand is particularly acute in the Brussels-Capital Region, which mainly
relates to the low education level of the workforce, faced with very high
qualification standards for occupa­tions in the city. A majority of jobs require highly-skilled workers – 55% in 2010 –
whereas barely 17% of jobs call for low-skilled workers ([46]). Nearly half of job seekers residing in Brussels have not
completed secondary studies; and early school leaving is particularly high as
discussed below. Falling behind at school is also a concern, since
approximately 50% of the pupils are one year or more behind. 
Impact on
disadvantaged groups
The
structural factors discussed above hit a number of groups especially hard, in
particular low-skilled young people, people with a migrant background and older
workers.
Unemployment among (mainly low-skilled)
young people is of particular concern. In 2014,
Belgium’s unemployment rate for young people (22.6%) was close to the EU
average (22.1%). However, the ratio between the rate of young unemployed and
the unemployment rate for people over 25 is among the highest in the EU (3.1 against an EU average of 2.5). Moreover,
the unemploy­ment rates for young people vary considerably between the
different regions, ranging from almost 45% for men in the Brussels-Capital
Region to only 13% in the province of West Flanders. In particular, the unemployment rate among young people with a lower level of
education (i.e. elementary or lower secondary school) is much higher in Belgium
than in neighbouring countries ([47]) , and the long-term unemployment rate among low- and
medium-skilled young people exceeds that of the whole active population by more
than half. Among unemployed low-skilled young people, those with a migrant
background are over-represented.
Employment among migrants with a non-EU
background is one of the lowest in the EU ([48]). This gap can be explained by differences in education levels and
a lack of language skills required by vacant positions, among other things.
Other factors that may explain employment rate differences between non-EU
immigrants and the general population are the large share of immigration for
non-labour motives, such as family reunification or asylum, the adverse effects
on employment of high minimum wages and reduced incentives to take up work at
low wage levels (see above). As a consequence of lower education levels and
lower social capital as well as labour market barriers, including
discrimination, people with a migrant background often work in sectors with
high turnover rates, on part-time contracts and for lower salaries. In all
groups with a migrant background (new arrivals as well as Belgian-born second
or third generations), the situation of women deserves particular attention.
The employment rate for women from outside the EU is lower in Belgium than in
any other Member State. 
The activity and employment rates of
older workers remain low. In Q2-2014 the employment
rate among 55-64 year-olds was 43.7% against an EU average of 51.7%. Steep
seniority-based pay-scale increases and relatively inexpensive early retirement
schemes (in particular, the topping-up of unemployment benefits with a company
allowance when companies restructure) give employers a strong incentive to
focus collective dismissals on older workers. On the labour supply side, the
relatively high financial disincentives to work embedded in the tax and benefit
system for those above 50 or on long careers reduce incentives to actively look
for re-employment after dismissal.
The regional governments have announced
their intention to use the competences trans­ferred from the federal level to
develop target group policies. Flanders has
announced a focus on labour cost reductions for young people, older workers and
people with disabilities. It also intends to streamline a number of employment
subsidies. Wallonia has announced a reform, oriented towards growth sectors and
self-employment, of labour-cost reduction measures focusing on young people and
more generally vulnerable people, Brussels will focus on young people, the
low-skilled and the long-term unemployed.
The regional and community government
agreements pay particular attention to easing the transition from education to
employment through measures announced in the Youth Guarantee Implementation
Plans. However, the Youth Guarantee schemes remain
incomplete and their implementation patchy. Effective partner­ships between public
employment services and education authorities, and more comprehensive
strategies to reach out to people not in education, employment or training, are
still lacking. There is also a need to set up earlier, tailor-made support for
the young. Also necessary are coordinated reforms to remove structural
impediments to accessing the labour market and improving skill levels and their
relevance to labour market needs, notably by improving the vocational and
educational training systems and preventing young people from leaving education
early. Better articulation of the various initiatives and better communication
and information about the Youth Guarantee are needed.
At the same time, other recent measures
appear to weaken employment prospects for young people.  Probation periods have for example been abolished since January
2014. Furthermore, since January 2015 the minimum wage is applicable in full
regardless of the worker's age, as compared to a gradual phase-in towards 100%
of the minimum wage at the age of 21 in the past. This phase-in supported
youths’ employability as it compensated employ­ers for lower initial
productivity and the need for on-the-job training following recruitment. 
Although the authorities have taken
several initiatives to improve participation in the labour market by people
from disadvantaged groups, such people continue to face structural entry
barriers. In particular, measures targeting people
with a migrant background essentially benefit new­comers. Belgian-born second
or third generation migrants are not covered. Moreover, successfully
integrating people with a migrant background into the labour market requires
their full participation in education and training, starting with linguistic
integration, education and care in early childhood (see section below).
For older workers some reforms of the
social security system have been launched over recent years to limit abuse of
the early-retirement schemes and raise the effective pension age. As a result, the total number of beneficiaries of the
early-retirement system has fallen by 5% in recent years. To further accelerate
this trend, the age and career-length requirements for early retirement are
being progressively tightened, and the social security contributions payable by
the employer on pre-pension top-ups have been increased. The reform of early
retirement and pre-pension systems (which combine unemployment benefits and
company-paid allowances) provides for progressively raising the entry age and
career requirements, while reducing pension rights and making stronger the
links between working careers and pensions. More recently, eligibility require­ments
for unemploy­ment benefit with company allowance have been further tightened
while labour market availability and job-search requirements have been extended
to all unemployed people below pensionable age and below 60 at the end of 2014.
The federal government agreement
envisages a major pension reform aimed at reducing the gap between the
effective and statutory retirement ages as well as linking the retirement age
to life expectancy. The early retirement age is to
be raised further after 2016, to 63 years by 2019 with a minimum career length
requirement of 42 years. Over the longer term, an increase in the statutory
retirement age is planned: from 65 to 66 in 2025 and to 67 in 2030. Moreover,
the progressive introduction of a credit-based pension system is planned, with
adjustment mechanisms that respond to demographic or economic develop­ments
such as an increase in life expectancy or changes in the economic dependency
ratio. However, there are still few incentives to support the employability of
older workers. Measures taken so far only address supply side issues.
Education and skills
While the Belgian education system
generally works well, large disparities in educational outcomes and significant
performance gaps between schools exist. Basic
skills attainment is good on average, although significant disparities between
the communities exist. Also, the Programme for International Student Assessment
(PISA) survey confirms large disparities in basic skills attainments which
partly reflect socioeconomic or migration back­grounds. Immigrant-specific
factors, like a different language spoken at home than the language of
instruction, help explain the performance gap. Although participation in early
childhood education is among the highest in the EU, educa­tional inequality
already starts in early childhood education ([49]). Pupils from disadvanta­ged backgrounds are more at risk of being
directed towards special needs education or vocational pathways with limited
opportunities for upward progression. They are also more at risk of dropping
out of education early. 
The communities have announced their
intention to lower grade repetition and to improve basic skills for all. The different government agreements also refer to ongoing
(Flanders) or new (French community) structural reforms of the lower secondary
education system. Flanders has introduced measures to improve competence in the
language of instruction. The French community has introduced a reform of the
first grade of secondary education which includes developing an action plan at
school level, and possibly at pupil level, to tackle low achievement. Measures
for early corrective action are envisaged. Moreover, recognising the urgency of
addressing educational challenges, in January 2015 the French community
launched a process to carry out a major reform of its compulsory education
system over the next ten years (‘Pacte pour un enseignement d’excellence’). The
scope of initiatives at pre-primary and primary levels remains limited,
however.
Long-standing priority education
policies have not yielded significant results and the most disadvantaged schools
lack experienced teachers and headmasters.
According to the 2013 Talis survey ([50]), Flanders scores among the worst when it comes to employing
the most experienced teachers in the most ‘challenging’ schools. Teacher
training faces the challenge of adapting to an increasingly multicultural
school population. Collaborative team working is not well developed. High
turnover of relatively inexperienced teachers is a particular problem in the
Brussels region. Other sources point to similar observations for the French
community ([51]). 
The communities intend to improve the
efficiency of priority education policies and recognise the central role of
teachers in addres­sing the challenges. Decisions
on a possible reduction in the additional financing for disadvan­ta­ged schools
have been postponed in anticipation of the results of ongoing (Flanders) or
planned (French community) evaluations of the current policies. At the same
time, cuts in expenditure affecting disadvantaged pupils have already been made
and consequences are difficult to assess. All the communities intend to take
measures to make teaching careers more attractive, reform teacher training and
improve support to school teams and new modes of teaching.
While the nationwide early
school-leaving rate has been falling, it remains very high in Wallonia and
Brussels ([52]). A comprehensive approach to countering this phenomenon in the most
affected regions is still lacking and is hampered by a lack of data,
assessments and effective coordination of action. The Brussels government has
opened the existing ‘Concertation Committee on Economic and Social Affairs’ to
the French and Flemish community. It intends to conclude a cooperation
agreement with the two communities to strengthen partnerships and develop early
intervention plans as well as remedial measures. Its goal is also to address
insufficient language competences. The French community plans cooperation with
Wallonia and Brussels to address early school leaving in the framework of the
‘Youth Guarantee Implementa­tion Plan’. The Flemish government is strengthe­ning
its 2013 action plan by expanding it to cover truancy and problematic
behaviour. A draft proposal is expected by April 2015.
Progress is slow on building stronger
links between education, training and employ­ment actors and improving
vocational training. The various government
agreements make reference to the need for stronger links to address the skills
mismatch, improve linguistic, vocational and educational training and develop
alternative trai­ning for pupils and the unemployed. In Flanders, most basic decisions
on the overall structure of secondary education have been postponed until 2016.
The French community and the regions started the reorganisa­tion of the
vocational and educational training offered into ten (geographical) areas. To
address horizontal skills mismatches, Flanders is continuing to implement its
science, technology, engineering and mathematics action plan and the
development of academies covering these fields.
Social inclusion
Overall, the risk of poverty or social
exclusion in Belgium is below the EU average, but higher than in neighbouring
countries. An increasing risk of poverty being
passed from one generation to the next is due to a wide range of mutually
reinforcing drivers like low work-intensity, low participation in care and low
educational achievement levels. People with a migrant background are at
disproportionate risk of poverty and social exclusion. The proportion of older
people who are at risk of poverty has fallen but is still above the EU average
and much higher than in neighbouring countries: 18.4% compared to an EU average
of 13.8% in 2013.
The impact of low work-intensity on
child poverty in Belgium is considerable. The share
of people living in households with very low work-intensity (14.0% in 2013) has
increased continuously since 2008 and exceeds the EU average (10.7%), while
about three quarters of minors living in very low-work-intensity households are
at risk of poverty.
The social gradient in the uptake of
care services for young children is the third highest in the EU. The more disadvantaged the family, the less likely the child is to
benefit from these services. Moreover, there are indications that children from
disadvantaged backgrounds are more often absent from kindergarten. These trends
are problematic as early childhood education and care services help to prevent
early school leaving later and improve educational results in the long term.
Furthermore, for parents (mainly mothers) there is a direct relationship
between having childcare and being able to work. This has potential
implications for enabling those further away from the labour market to become
active, and thus for (female) labour market participation. 
As well as putting increased emphasis on
active labour market policies, the federal government plans to increase certain
social benefits to better address poverty and foster social inclusion. The minimum pension for a full career will be set at 10% above the
poverty threshold and the minimum social insurance and social assistance
benefits will be increased progressively to this threshold. The sixth state
reform has transferred a number of additional policy levers to the regions and
communities, including child allowances. All the new governments have included
social inclusion and anti-poverty announcements in their policy declarations,
but the exact scope of the measures is not yet defined. 
Taxation
The overall tax level in Belgium is the
second highest in Europe, after Denmark, amounting to 45.4% of GDP in 2012. The structure is characterised by a relatively high share of direct
taxes, reflecting a broad reliance on personal and corporate income taxes, and
social contributions. By contrast, revenues from indirect taxes expressed as %
of GDP are just below the EU average.
 Graph 3.2.1:   Decomposition of the implicit tax rate on labour (2012) 
 Source: Taxation Trends in the European Union, European Commission, 2014. 
Belgium imposes relatively heavy taxes
on labour with an implicit tax rate on labour of 42.8% in 2012 — the second
highest in the EU (see Graph 3.2.1). Less growth-distorting taxes, such
as environ­mental and consumption taxes account for a lower share of total tax
revenues and as a percentage of GDP than the EU average. Revenues from
consumption taxes amount to 10.8% of GDP in 2012, below the EU average of
11.2%. On the other hand, as shown in Graph 3.2.2, the implicit tax rate on consumption
(21.1%) stands just above the EU average (19.9%) indicating a lower share of
consumption in GDP. Revenues from environmental taxation have declined since
2005 and amounted to 2.2% of GDP in 2012 (see Graph 3.2.3), below the EU average of 2.4% of GDP.
In particular, revenues from energy taxation are the second lowest in the EU
(1.3% of GDP against an EU average of 1.8%) which contrasts with the high
overall tax-to-GDP ratios. 
 Graph 3.2.2:   Decomposition of the implicit tax rate on consumption (2012) 
 Source: Taxation trends in the European Union, European Commission, 2014. 
The Belgian tax system is characterised
by relatively high tax rates and narrow tax bases.
High rates of personal income taxation are accompanied by many tax expenditures
(e.g. mortgage-or pension-related), while corporate taxation could be described
as a ‘niche system’ with targeted specific features and high statutory rates.
The VAT system taxes many goods and services at reduced rates. In general,
targeted reductions and tax expenditures are often seen as convenient
instruments to accommodate vested interests. Although special regimes might be
warranted in particular cases (e.g. as an incentive for R&D), they
generally introduce distortions among taxpayers and create efficiency losses.
The numerous special arrangements make
the Belgian tax system prone to tax evasion or aggressive tax planning, and
increase the implementation and compliance costs.
This is the case, for example, with the system of notional interest deduction,
which acts as an incentive for multinational companies to undertake intra-group
lending and borrowing (see section 2.3) merely for tax reasons.
Given these weaknesses, Belgium has been
repeatedly recommended to simplify and redesign its tax system in order to
rebalance the tax burden, close tax loopholes and reduce the sometimes harmful
differentiation created by taxation niches.
High labour tax
burden
For nearly all indicators measuring the
labour tax burden, Belgium tops the EU rankings.
The aggregate implicit tax rate on labour stood at 42.8% in 2012 compared with
an EU average of 36.1% ([53]). This has a
major impact on labour costs and cost competitiveness (see section 2.1), and
also has strong implications for some specific groups in terms of financial
disincentives to work (see section 3.1).
Overall, budgetary constraints are
hampering efforts to reduce the high taxation of labour. There is nevertheless substantial scope to rebalance the tax
system. Indeed, while the general level of taxation is high, revenues from some
non-labour sources are closer to or below the EU average ([54]). To alleviate the tax burden on labour, economic evidence suggests
shifting taxation to less-distorting types of taxes, such as consumption and
environmental taxes and, potentially, recurrent taxes on immovable property ([55]). In parallel, base broadening could also contribute to reducing
the high taxation of labour (see below).
The federal government has adopted some
measures to alleviate the tax burden on labour, notably by increasing take-home
pay and through plans to reduce social security contributions. The revenue loss was offset by an increase in most excise duties,
some minor changes in VAT legislation, the non-indexation of a series of tax
expenditures and some taxes on financial income. However, so far no comprehen­sive
reform of the tax system has taken place.
In the framework of their recently
increased tax autonomy, the regional governments have also announced some
taxation measures. The Flemish government has
reduced the personal income tax expenditure for mortgage payments and has
announced it will streamline the targeted reduction of employers’ social contributions
(see section 2.1), simplify property transfer taxes and consider
distance-related tolls or time-based user charges for passenger cars instead of
the current car registration taxes. The Walloon Region has also announced that
it will use its tax autonomy in the framework of a forthcoming pact for
employment and training. Most existing personal income tax credits have been
reduced or are under review, while some environmental taxes have increased or
will have a stronger environmental element in the tax base. The
Brussels-Capital Region has set up an expert group to work on a tax shift from
personal income taxes towards immovable property and a broadening of tax bases,
to be implemented by 2017. This move reflects Brussels’s specific regional
characteristics of a comparatively high stock of property and a population with
a relatively low average personal income. Overall these measures seem likely to
make the tax system less growth-distorting.
Low
environmentally related taxes 
Belgium’s revenues from environmentally
related taxes are among the lowest in the EU (see
Graph 3.2.3). Environmentally related taxes are
not only a means for generating revenue but also offer a way of internalising
the external costs — such as water, soil and air pollution, waste generation or
greenhouse gas emissions — that the production and consumption of goods and
services impose on the environment. Environmental taxes can also encourage the
efficient use of resources, stimulate innovation and improve how markets
function by correcting market failures. In 2012, revenues from environmental
taxes amounted to 2.2% of GDP, compared with an EU weighted average of 2.4%
(i.e. 4.8% of total tax revenues, compared with a weighted EU average of 6.1%
of GDP, which ranks Belgium 27th among all Member States). The
implicit tax rate on energy (EUR 131.5 per tonne of oil equivalent) is far
below the EU average of EUR 222.8, putting Belgium 20th out of the 28 Member
States. 
In addition, the Belgian tax system
contains environmentally harmful (tax) subsidies which send the wrong price
signals in terms of the environmental impact of activities and behaviour ([56]). One
example is the favourable tax treatment of company cars in personal income
taxation ([57]). These
in-kind benefits are often included in employees’ remuneration packages in
order to offset high labour taxation, especially social security contributions.
However, at macro-level the system has a considerable budgetary cost. Moreover,
because it encourages both professional and private use of the car, it creates
harmful environmental and economic effects in terms of congestion costs and
pollution. By removing the price signal to the driver, it also hinders some of
the incentive effects of efficient environmental taxation (e.g. km charging).
 Graph 3.2.3:   Environmental taxation (2012, % of GDP) 
 Source: Taxation Trends in the European Union, European Commission, 2014 
Given the need to take additional
measures to achieve national greenhouse gas emission targets, Belgium could
benefit from greening its tax system. In
particular, current low fuel prices provide an opportunity to re-assess the low
taxation of some energy products, such as diesel and heating oil. Increased
revenues from energy taxation would create fiscal space to decrease high taxes
on wages.
Narrow tax bases
The total amount of tax expenditures
(i.e. tax relief) is sizeable in Belgium, and still rising as a percentage of
GDP. The foregone revenue reached EUR 25.6 billion
or 6.8% of GDP for income year 2012, mainly from reduced rates in VAT and tax
deductions in personal income taxation ([58]). 
In general, a broad tax base with a
lower rate is economically less distortive than a narrow base with a higher
rate. Broadening the tax base by removing some tax
expenditures could simultaneously make the tax system simpler, fairer, and more
efficient. Moreover, it would generate additional revenues which would allow a
reduction in tax rates on labour. Although some well-designed tax expenditures
can enhance positive spill-overs and welfare, it is important to ensure that
they do not cause harmful economic distortions and that they are the most
effective and cost-efficient means of achieving their economic and social
policy objectives. The decision on whether to introduce or keep tax
expenditures in place should therefore be based on a case-by-case analysis of
costs and benefits.
Value added taxes
VAT efficiency could be improved by
having a broad base, limiting the use of exemptions and reducing the scope for
a diversified rate structure ([59]). This would also help to simplify the
tax system and could, in the context of a tax shift, allow labour taxes to be
reduced. The potential re-distributional effects could be offset by
accompanying measures outside the VAT system. Policy tools other than VAT might
be better targeted at specific groups, and may achieve the envisaged goals at a
lower budgetary cost with fewer economic distortions. Hence there is a need for
a comprehensive tax reform rather than isolated adjustments ([60]).
The federal government has announced a
limited broadening of the scope of the standard VAT rate by making plastic surgery services for non-medical reasons subject
to VAT and strengthening the conditions for applying a reduced VAT rate on the
renovation of private dwellings. However, no measures involving a broad review
of current reduced rates have been announced.
Personal income taxation and social
security contributions
The main tax expenditures have a social character (e.g. tax reduction for some social
benefits), promote home ownership (e.g. tax reductions for mortgage payments)
or stimulate certain forms of financial investment (e.g. pension savings).
Work-related tax expenditures aim to make work pay’. These include tax credits,
tax rate reliefs and exemptions for specific individuals. Their aim is to
stimulate labour supply as well as redistribute income. The tax rebates for
service vouchers and extra-hours have shown a steady increase since they were
introduced. Extra-hours are also incentivised on the employers' side through
the exemption of withholding taxes. This wage subsidy for particular workers
and/or industries was introduced in 2005 and further expanded (shift work,
night work, researchers and scientific workers). Moreover, most salary packages
include in-kind advantages as a way to avoid high labour taxes. Collective
pension plans and company cars are the most common fringe benefits. Lastly, a
tax exemption on the interest income on savings deposits (up to a certain
threshold) raises both efficiency and equity concerns.
Corporate income taxation
In corporate income taxation, there is
considerable room for a review of existing tax expenditures, as the system is
characterised by a high rate and narrow base. The
statutory rate in Belgium stands at nearly 34%, which makes it one of the
highest in the EU. However, other indicators such as estimates of the effective
average tax rate rank lower and are closer to the levels in comparable EU
economies ([61]). This big
difference between statutory and effective rates is due to several features of
the tax system, including the allowance for corporate equity (ACE), referred to
as 'notional interest on corporate capital', which aims to reduce the tax bias
between debt and equity financing by allowing the deduction of a ‘notional
interest’ on all equity. Other tax expenditures, such as the reduced rates for
small and medium-sized enterprises, and accelerated depreciation mechanisms,
also contribute to eroding corporate tax revenues. 
The international dimension, especially
the EU context, has to be considered in applying the concept of tax
expenditures to corporate taxation. Some of the
features of Belgium's corporate income tax system may be used for tax planning
purposes by cross-border structures. Provisions such as the ‘excess profit
ruling’ ([62]) are
currently under scrutiny by the European Commission. Some of the provisions of
the allowance for corporate equity are open to abuse, entailing budgetary
costs ([63]). While
there is room to close these loopholes, the federal govern­ment has reiterated
its commitment to maintaining the allowance for corporate equity and has
recognised the need to ensure stability and trust to promote entrepreneurship.
The decrease in the reference government bond rate as well as provisions for
limiting the eligible equity in the financial sector will decrease the
budgetary impact of the system.
Reforming the tax
system
Since the last European Semester,
Belgium has taken some measures to lower the tax burden on labour, while most
tax increases seem to avoid the most growth-distorting tax bases. However, the measures adopted so far are of rather limited scope
given the size of the challenge and do not constitute a comprehensive rethink
of the tax system as suggested by the recommendation addressed to Belgium in
the 2014 European Semester.
This being said, there is a proclaimed
political commitment to implement further tax reforms. In the coalition agreement, the federal government took a
commitment to reform, simplify and modernise the tax system, and to implement a
tax shift. Some preparatory work has been done both through parliamentary
hearings and an analytical and detailed report, including quantita­tive
estimates, prepared by the High Council of Finance and published in August 2014
([64]). Proposals
for tax reform have been the subject of much discussion, albeit mainly as part
of a polarised debate about striking the right balance between taxation of
labour and capital. In contrast to this narrow interpretation, a genuine tax
reform should be interpreted broadly, i.e. through a shift to a wide range of
taxes which distort growth less, in combination with cuts in tax expenditures
(reviewing existing tax provisions, subsidies, exemptions and deductions). In
this respect, an overall tax reform needs to be carefully designed, taking into
account budgetary, economic, social and environmental objectives, and
simultaneously fight against tax evasion and aggressive tax planning.
Fiscal framework
The sixth state reform, adopted at the
end of 2013, devolved additional responsibilities to the Belgian regions and
communities as of mid-2014. Their share in general
government primary expenditure will rise from around 26% before the reform to
32%. The regions also won additional tax autonomy through ‘enlarged regional
surcharges’ on federal personal income taxes, which is offset by an equivalent
tax reduction at federal level. However, the devolved responsibili­ties are not
fully matched by additional financial resources. In other words, besides a
transfer of responsibilities, the sixth state reform also transfers some of the
burden of consolidation to the regions and communities.
Belgium’s decentralised structure and
the lack of a ‘hierarchy of norms’ between the different levels of government
call for effective budgetary coordination in order to reach general government
fiscal targets and respect European fiscal rules.
In the 2014 European Semester, it was recommended that Belgium ensures a balanced
contribution by all levels of government to the fulfilment of fiscal rules
including the structural budget balance rule, through a binding instrument with
an explicit breakdown of targets within a medium-term planning perspective. An
ad hoc burden-sharing arrangement for 2014, which had been concluded in July
2013, does not seem to have been respected, resulting in a substantial slippage
in the 2014 general government target. The changeover to ESA2010 statistical
rules and reclassification of some investment inside the general government
sector, especially at regional level, has complicated the implementation of the
arrangements and the achievement of agreed targets.
At the end of 2013, a Cooperation
Agreement on fiscal coordination was concluded between the federal government
and the regional and community governments to implement the Fiscal Compact. The agreement introduces a structural government balance rule
(defined in line with the medium-term objective) at general government level.
Furthermore, it formalises established coordination practice by making official
the role of the intergovernmental ‘Consultative Committee’ in the process and
making the advisory role of the High Council of Finance (Public Borrowing
section) more explicit. The agreement also envisages strengthening the
monitoring role of the High Council by introducing an explicit correction
mechanism in case of significant deviation from the agreed targets. However,
this agreement does not seem to have been fully implemented so far. The new
governments in place at federal, community and regional level have all set
their own fiscal trajectory for 2015 and beyond without formal coordination to
date. 
Lastly, it is important to ensure
concrete arrangements ensuring the autonomy of the High Council of Finance
(Public Borrowing section) in terms of its composition, decision-making,
communication and access to information in view of the greater responsibilities
granted by the recent cooperation agreement.
Another institution, the Federal Planning Bureau, has a longstanding tradition
of producing the macroeconomic forecasts underlying budgetary planning at all
levels of government.
Well-functioning domestic product
markets contribute to external competitiveness.
They do so directly by providing important inputs to other companies (see
section 2.1). However, there is also an indirect effect given that, even for
'non-tradable ' items, their cost affects the general price level. As such,
they are an important driver of wage growth given the general practice of
automatic wage indexation in Belgium. 
A new integrated competition authority
was set up in 2013. It ensures continuity by
pursuing the enforcement work of its predecessor. It has also launched a number
of new antitrust investigations and adopted a new policy on fines and informal
opinions. However, its staffing level has further decreased since its creation,
affecting its ability to enforce competition rules more comprehensively. 
Service markets
The low availability of e-procedures and
their cross-border accessibility is a general obstacle to the smooth
functioning of service markets. This reflects the
general underuse of ICT solutions in public services. Service sectors that are
considered to feature certain problematic characteristics are the professional
services sector and the retail sector.
Professional
services
Professional services are among the
business services discussed in section 2.1, where their importance as inputs
for the wider economy was underscored. However,
high entry and conduct barriers have been found for certain professions. Legal
and accounting activities, in particular, have both high entry and conduct
regulations, according to the OECD Product Market Regulation indicator ([65]). For architects conduct regulations were also seen as high, while
for engineers no restrictions what­ever were found. Regulations cover the
required legal form and shareholding requirements, entry tests, obligatory
chamber membership, and authorisation schemes. The existence of such
regulations constrains business dynamics through entry and exit rates and
creates inefficiencies as well as excessive rents ([66]). Conversely, lowering or abolishing them enhances the allocative
efficiency of the economy.
 Graph 3.3.1:   'Churn' rate: professional, scientific and technical activities (avg 2008-11) 
 Note: 'Churn' rate = company start-ups  ('birth rate') + insolvencies ('death rate') Source: European Commission 
Belgium’s 'churn’ rates' — the sum of
company start-ups and insolvencies and as such an indicator of a sector’s
dynamism and its capacity for renewal — are among the lowest in the EU for all
four professions mentioned above. Both start-up and
insolvency rates are particularly low in Belgium for business services in
general (see Graph 3.3.1) ([67]). Furthermore, while several Member States, including neighbouring
France, have been reforming regulated professions, action in Belgium has been
rather muted. 
The sixth state reform devolved power
over access to a number of regulated professions to the regions. While this mainly affects technical professions (i.e. commercial
and craft professions such as e.g. bakers, undertakers and opticians), it is
unclear how mutual recognition of professional qualifications will be organised
if regions develop different qualification require­ments. Changes made so far
have had little impact on the restrictions that apply to professional services.
 Graph 3.3.2:   'Churn' rate: retail (average 2008-11) 
   
 Note: 'Churn' rate = company start-ups  ('birth rate') + insolvencies ('death rate') Source: European Commission 
Retail services
The retail sector continues to be the
subject of a number of regulations that hinder its develop­ment. Price levels and growth rates for both food and non-food products
are substan­tially higher in Belgium than in neighbouring countries. While
certain factors inherent to the country help to explain this difference ([68]), the Belgian retail sector also displays one of the highest levels
of regulation and operational restrictions, according to the OECD Product
Market Regulation indicator. These hinder the sector's development and may
impact prices. Estimates suggest the price-cost margin or mark-ups in the
Belgian retail trade sector are the second highest of all Member States ([69]).
Following last year's transfer of responsibility
for retail establish­ments to the regions, new regulatory frameworks have been
introduced but have not yet become operational.
Brussels has adopted new regulations, in Wallonia the adoption process is
on-going, and Flanders has presented a draft law. All three regions aim to
relax the regulatory environment by introducing a single permit system. The
imple­mentation of these new frameworks will show whether the reform has a
positive impact on market entry barriers by reducing the length and complexity
of the procedures for authorising retail establishments.
Transportation    
The transport sector is still suffering
from the inefficient way the market functions. No
steps have been taken to open up the domestic rail passenger market to
competition. Although rail punctuality improved in 2014, domestic indicators
show it remains rather poor. The planned Brussels Regional Express Network has
suffered repeated delays and is scheduled to become operational only in 2025.
Port labour legislation prevents port
service providers from freely choosing their workforce and requires workers to
register in a labour pool. Moreover, these
restrictions to the freedom of establishment are applied in a discriminatory
manner. Given the importance of ports for the Belgian economy, a modernisation
of port labour legislation could serve as a catalyst for further development of
the sector and enhance its international position. The Belgian authorities are
currently revising the legislation to accommodate these concerns.  
Energy markets 
Retail markets for gas and electricity
have become significantly more dynamic in recent years, as reflected in lower
market shares, higher switching rates and higher entry rates. This was triggered by several government measures to enhance price-consciousness
and make it easier to switch providers which have stimulated competition on the
market. The 'safety net mechanism' introduced continuous monitoring by the
federal regulator of the commodity compo­-
 Box 3.3.1: Security of energy supply Over the course of 2014 it became clear that domestic generation problems would push the import capacity towards its limits during the winter months of 2015, risking to result in temporary supply shortages in case of severe weather conditions. In recent years, several (gas-fired) electricity plants have been shut down because of the weak profitability compared to coal-fired and renewable units. As a consequence, demand has been increasingly met through imports. This gas-fired capacity is however needed to meet peak demand of around 14 000MW during winter, all the more so as domestic capacity was substantially further reduced following the prolonged outage of three nuclear reactors with a combined power of 3 000MW or about a quarter of domestic generation capacity. In order to avert severe supply problems, Belgian authorities took a series of measures, including the creation of a strategic reserve. This reserve represents 850MW, mainly composed of generation units that were temporarily stopped recently or that were already mothballed. Costs will be covered by a surcharge on transport tariffs. In addition, a public awareness campaign was launched. As a measure of last resort a plan was developed to activate controlled power cuts of 3 000MW in case supply would nevertheless fall short of demand. Relatively mild weather conditions made that no shortfall emerged in the first two months of 2015. The supply outlook for upcoming winters remains precarious with several additional gas-fired plants expected to be taken offline. The impact in the short term hinges on the availability of the nuclear facilities with only little renewable capacity scheduled to be added to the grid. To accommodate for this risk, the new government wants to raise the strategic reserve to 3 500MW, less if nuclear units are reactivated timely. It remains to be seen whether such amount of back-up capacity can effectively be pulled together (1). At the same time the government announced its intention to further delay the start of the nuclear phase-out, which would still be completed by 2025 (2). This entails a total loss in domestic production by about 6 000MW, roughly half of the total. In order to avert the scenario of a chronic supply risk and to enable a proper absorption of renewable energy the interconnectivity of the Belgian electricity grid needs to be enhanced. Even during normal winter conditions, Belgium relies significantly on imports from France and the Netherlands. Evidently, the use of the 3 500MW import capacity depends on excess capacity in these countries. Given domestic developments, both an increase and a broadening of interconnectedness are required.  The Nemo project will create the first interconnection to the UK, ALEGrO the first direct interconnection to the German grid. The projects have a combined capacity of 2 000MW and are scheduled to become operational in 2019. Other projects aim to expand the capacity for electricity generated in France and the Netherlands. However, overall security of supply bows to a large extent on domestic generation adequacy through the development of new capacity (3). A recent study highlighted the daunting investment needs Belgium faces over the long term given the nuclear phase-out and the growing share of intermittent capacity (4). Especially in 2020-25 important replacement capacity will be required, necessitating short term action. To provide for a better investment climate, the federal government plans to come to an 'energy pact', underpinned by a common energy vision with the regions. The overarching goal of the pact would be to guarantee the supply of clean and affordable energy for the next 20-25 years. In the short term, a call for tender for new conventional plants with a total capacity of 800MW is planned. In order to ensure cost-effectiveness a state support mechanism would be attached, offering ex-post compensation for unfavourable market conditions.   _____________________________________________________ ([1])  The initial aim for the strategic reserve for this winter was 1 200MW, 350MW more than was effectively found. (2)  The two smallest nuclear units were scheduled to be closed this year. On the basis of the new plans, the first unit would be taken offline in 2022. (3)  It should be noted that the impairment of the security of energy supply was already highlighted in a 2007 report by federal regulator CREG given the observed lack of investment. (4)  FPB, Het Belgische energiesysteem in 2050: Waar naartoe?, 2014. 
nent of energy prices in Belgium and
neighbouring countries. As a result, energy suppliers need to be able to
justify price changes. This has made price formulas and adjustments more
transparent and has broken the erstwhile link with oil prices. The federal
government has decided to extend this mechanism by a maximum of three years,
i.e. until December 2017. Overall, average energy prices have moved closer to
those in neighbouring countries. This is especially the case for gas, whereas
overall electricity prices for residential users continue to be higher than
those in most neighbouring countries (see Graph 3.3.3). The disruption to domestic nuclear
production (see Box 3.3.1) also led to a spike in wholesale
future prices in Q3-2014, underscoring the need for grid interconnectedness to
be developed further. Consi­dering that German market prices (i.e. excluding
taxes and levies) are considerably below Belgian prices, the need to create
links with Germany appears the most acute.
 Graph 3.3.3:   Electricity prices for residential consumers (all taxes and levies included) 
 annual consumer profile: between 2 500 and 5 000KWh Source: European Commission 
The lasting price differential for
electricity mainly reflects taxes and levies.
Distribution network tariffs, in particular, are high in Belgium. These are
charged by distribution network operators. As well as actual distribution costs
resulting from grid management, the costs of public service obligations are
also included, such as those arising from the distributors’ obligation to
purchase green certificates. Network distribution tariffs applicable during 2008-12
were extended until the end of 2014, with the competence for setting the
tariffs transferred to the regional regulators since July 2014.
Frozen tariffs were too low to cover all
costs incurred by network distributors, resulting in the build-up of a sizeable
overhang in recent years. In particular in
Flanders, the rapidly rising costs of renewable energy and combined heat and
power support schemes saddled distributors with a growing volume of green
certificates that could not be passed on to final prices given the tariff
freeze. At unchanged policy, certificates worth EUR 1.8bn would be pre-financed
by distributors at the end of 2015 ([70]).
At the end of 2014, Flanders adopted a
new tariff methodology. It switched to a 'revenue
cap' approach to encourage distribution system operators to find efficiency
savings and to prevent a rapid build-up of new losses. The regulators in the
two other regions decided to continue using the federal methodology.
The new Flemish electricity tariff
covers 2015-16 and entails a first increase to recover costs incurred in
2008-09. Given the fast build-up of uncharged certificates in 2010-14, further
major increases will be required to recover the legacy
cost of generous and protracted subsidy schemes. This is expected to lead to considerable price increases for residential
users, including most SMEs. The full pass-through of the overhang by 2019,
combined with the additional costs of certificate schemes at the federal and
Flemish level (due to offshore wind power and biomass plants respectively),
might push up overall prices by 20% for the average Flemish SME according to
Serv estimations.
Belgium also faces important challenges
regarding the adequacy of its domestic power generation and security of supply
in general (see Box 3.3.1).
 Graph 3.4.1:   Remaining gap to 2020 reduction target for non-ETS greenhouse gas emissions 
 - gaps (+/- for shortfall/over-delivery) are expressed as percentages of the base year (2005) - non-ETS emissions: emissions not covered by the European Emissions Trading System (EU ETS) Source: European Commission, based on Member State projections 
Greenhouse gas emissions
Without additional measures or the use
of flexible mechanisms Belgium would miss its 2020 greenhouse gas emission
reduction target by 11 pps., according to its own projections ([71]). This implies one of the largest
remaining efforts among all Member States (see Graph 3.4.1). More affirmative action is hindered
by the absence of a political agreement between the federal and regio­nal
entities on the distribution of the effort needed and revenues from the
auctioning of emission allowances under the EU ETS. It remains unclear to what
extent the cooperation agreement under negotiation will provide a satisfactory
answer to the need for a clear distribution of efforts.
Several policies and measures to reduce
emissions have been announced but their implementation remains uncertain. The regional government declarations put energy efficiency forward
as the main priority. However, without a, effort-sharing agreement the auction
revenues cannot be mobilised to support these measures. Furthermore, in
Flanders a significant proportion of these funds will likely be earmarked for
compensating energy-intensive industries for electricity price increases. It is
therefore unclear how much will actually be available for climate protection
and by when. Revenues from auctioning amounted to almost EUR 115mn in 2013, but
it is not clear what share was (planned to be) used for climate and energy
related purposes. There is also no clarity on how far flexible mechanisms will be
used to meet the targets. The situation is particularly pressing for the
residential sector and road transport, which in 2012 were responsible for 14.6%
and 21.4% of total greenhouse gas emissions, compared with EU averages of 9.4%
and 19.7%. On this basis, it remains unclear whether the planned measures will
be fully imple­mented and sufficient to reach the 2020 target.
Renewable energy
Belgium has made good progress in
developing renewables. The country's 2020 target is
13% of final energy consumption. This goal provides a strong incentive to
invest in the fast-growing sector of renewable energy technology. In 2012 the
renewable share reached 6.8 % and provisional data for 2013 indicate it rose to
7.5%. The distance to the 2020 target remains large, though.
The generation of renewable electricity
has been rising especially fast, supported by green certificates, guaranteed
price schemes and an offshore wind installation programme. The share of renewables in total electricity generation rose to 25%
in 2013. Their cost, however, translates into high distribution tariffs. As
discussed in section 3.3, these tariffs are set to rise further. Consequently,
support levels were already reduced in 2013 and 2014, and distribution tariffs
are gradually being applied to all producers, including those generating
electricity for their own consumption. In coming years, offshore wind will be
further developed at the federal level, while support to renewables could be
subject to further revisions in line with new EU state aid provisions. There
seems to be no intention, however, to improve synergies between the different
green certificate systems in the regions and exploit the potential efficiency
gains.
Resource efficiency
Lacking natural resources and being a
centre of energy-intensive industrial activity, Belgium is a structural net
energy importer. Energy intensity is also
relatively high for the transport and residential sectors. Measures to
stimulate investment in energy efficiency would therefore improve Belgium's
overall economic efficiency, reduce its import dependency, strengthen the
balance of payments position, reduce the economy's vulnerability to external
price shocks and cut greenhouse gas emissions. Although primary and final
energy consumption both fell in 2005-13, Belgium is not on track to meet its
national energy efficiency targets.
A number of measures have been announced
to improve energy efficiency, especially in the buildings sector. There is no guarantee that these measures will be implemented,
however, given that the revenues from the auctioning of emission allowances are
not available for use, as mentioned above, and that the federal coalition
agreement envisages that an energy vision and energy pact will be agreed only
by the end of 2015. It is therefore unclear what the effect on energy demand
and emission reductions will be.
The Commission's 2015 Annual Growth
Survey underlines the need for better waste manage­ment, recycling and water
treatment facilities. Preventing and reducing waste
generation together with increasing reuse, recycling and innovative product
design could improve resource efficiency. Belgium has already made some headway
on this broad challenge. Additional progress could be made by introducing new
economic instruments to promote waste prevention, avoid incinerating reusable
or recyclable waste, and make the reuse and recycling of waste more econo­mically
attractive. At the same time, phasing out subsidies for incineration would help
in shifting taxation towards environmental taxes (see section 3.2).
Congestion
Compared with most other countries,
Belgium has a serious and growing ([72]) problem with peak hour congestion, both in urban areas and on
essential interurban links. It has been estimated
that the annual costs of delays from congestion in Belgium are around 1% of
GDP ([73]). Road
conges­tion generates higher fuel consumption and contributes to air pollution.
Total air pollution is estimated to be responsible for almost 10 000
premature deaths annually in Belgium and 2.5 million lost workdays due to
related sickness ([74]).  
In several cases, the intention to
tackle conges­tion announced in the federal and regional government agreements
still needs to be turned into tangible measures.
The timing of some of the measures announced is unclear, as is whether they can
be achieved. Despite the increasing serious­ness of the problem, several
elements remain partially unaddressed, including (1) the potential for
time-differentiated congestion charging to encourage better use of the
infrastructure by passenger cars; (2) the favourable tax treatment of the
private use of company cars and fuel cards; and (3) inefficiencies in public
transport.
 Commitments || Summary assessment ([75]) 
 2014 Country-specific recommendations (CSRs) 
 CSR 1 Following the correction of the excessive deficit, reinforce the budgetary measures for 2014 in the light of the emerging gap of 0.5% of GDP based on the Commission services 2014 spring forecast, pointing to a risk of significant deviation relative to the preventive arm of the Stability and Growth Pact requirements. In 2015, significantly strengthen the budgetary strategy to ensure the required adjustment of 0.6% of GDP towards the medium-term objective, which would also ensure compliance with the debt rule. Thereafter, until the medium-term objective is achieved, pursue the planned annual structural adjustment towards the medium-term objective, in line with the requirement of an annual structural adjustment of at least 0.5% of GDP, and more in good economic conditions or if needed to ensure that the debt rule is met in order to put the high general government debt ratio on a sustained downward path. Ensure a balanced contribution by all levels of government to the fulfilment of fiscal rules including the structural budget balance rule, through a binding instrument with an explicit breakdown of targets within a medium-term planning perspective. || Belgium has made limited progress in addressing CSR 1 (this overall assessment of CSR1 excludes an assessment of compliance with the Stability and Growth Pact): Belgium has made limited progress to ensure a balanced contribution by all levels of government to the fulfilment of fiscal rules: ·       A Cooperation Agreement concluded between the federal government and regional/community governments on 13 December 2013 introduces a structural budget balance rule for general government and formalises fiscal policy coordination among different layers of government. It has not been put into practice so far. The new governments in place at federal, community and regional level have all set their own fiscal trajectory for 2015 and beyond without formal coordination to date.   
 CSR 2 Improve the balance and fairness of the overall tax system and prepare a comprehensive tax reform that will allow shifting taxes away from labour towards more growth friendly bases, simplifying the tax system, closing loopholes, increasing VAT efficiency, broadening tax bases, reducing tax expenditures and phasing out environmentally harmful subsidies.   || Belgium has made limited progress in addressing CSR 2: ·       Shifting taxes away from labour: Increase in the ceiling of the lump sum allowance for professional expenses (by EUR 14/month in 2015, repeated in 2016). Tax duties on standard shares were increased from 2.5% to 2.7%, on capitalisation shares from 1% to 1.3%. ·       All excise duties are annually indexed as of 2015. Additional increases in excise duties are planned for tobacco (2015) and diesel (2016). The Brussels Capital Region has set up a task force to simplify the tax framework and introduce a shift to immovable property taxes. ·       Simplifying the tax system: Announced reduction in social security contributions by employers from 33% to 25% through absorption of existing reductions. ·       Reducing tax expenditures: A number of tax expenditures will not be adjusted for inflation between 2015 up to 2018. The Flemish region reduced the personal income tax reduction for owner-occupied housing. ·       Phasing out environmentally harmful subsidies: By the automatic annual adjustment of the CO2 baseline emissions for the year 2015, the private use of company cars is taxed slightly higher. Regional governments have announced the introduction of a kilometre-based charge for trucks as of 2016. The Flemish region aims to change the fiscal base for car taxation in line with 'polluter-pays' principle. ·       Increase in VAT efficiency: Forthcoming VAT increase to standard rate of 21% for plastic surgery (for non-medical purposes) and for renovations of dwellings less than 10 years old (instead of 5 years). 
 CSR 3 Contain future public expenditure growth relating to ageing, in particular from pensions and long-term care, by stepping up efforts to reduce the gap between the effective and statutory retirement age, bringing forward the reduction of early-exit possibilities, promoting active ageing, aligning the retirement age to changes in life expectancy, and improving the cost-effectiveness of public spending on long-term care.   || Belgium has made substantial progress in addressing CSR 3: Substantial progress towards reducing the gap between effective and statutory retirement age: ·       Minimum age and career length requirements for early exit through the elderly unemployment benefit system ('unemployment benefits with company top-ups') are tightened progressively with the minimum age increased to 62y since Jan-2015. Transitional rules and exceptions apply for arduous professions, long careers and collective dismissals. ·       Labour market availability and job search requirements have been extended to all unemployed below the pensionable age (previously 60y) with the exception of unemployed aged 60 at the end of 2014. ·       Further increases announced in the minimum age and minimum career length for early retirement after 2016 (from 62y to 63y and from 40 to 42 career years between 2016 and 2019). ·       Gradual reform of the civil servant pension scheme planned for 2016, altering the accrual rules so as to extend the average working career. Limited progress to promote active ageing ·       The pension bonus for those working beyond the age of 62 has been abolished, reducing the financial incentive to extend the working career. ·       The time credit system, enabling workers to take a career break while receiving an allowance, has been reformed. While the system of 'unmotivated breaks' has been abolished, the possibility to take up 'motivated time credit' has been extended from 36 to 48 months for childcare, palliative care or to assist a seriously ill member of the household. ·       Access to 'end-of-career' time credit for elderly workers with a career of at least 25 years, will be granted from 60 years of age. Access at the age of 55 remains possible for arduous professions, night work, the construction sector and (anticipatory) collective dismissals. ·       FL: employment incentive for elderly workers has been refocused on the age group above 55: subsidy no longer applies to workers between 50 and 55 who have been unemployed less than a year. Some progress to align the retirement age with changes in life expectancy: ·       Increase announced in statutory retirement age, to 66 in 2025 and 67 in 2030. ·       Planned reform would introduce a credit-based pension system allowing for automatic adjustment mechanisms in response to demographic and/or economic developments. 
 CSR 4 Increase labour market participation, in particular by reducing financial disincentives to work, increasing labour market access for disadvantaged groups such as the young and people with a migrant background, improving professional mobility and addressing skills shortages and mismatches as well as early school leaving. Across the country, strengthen partnerships of public authorities, public employment services and education institutions to provide early and tailor-made support to the young.   || Belgium has made some progress in addressing CSR 4: Some progress to reduce financial disincentives to work: ·       Increase in the ceiling of the lump sum allowance for professional expenses (by EUR 14/month in 2015, repeated in 2016). ·       Temporary unemployment benefits are calculated on the basis of 65% of the reference wage (instead of 70% before). ·       Eligibility requirements for the income top-up for part-time unemployed are tightened and the allowance is reduced. A time limit of 2 years is also envisaged, following which an evaluation is planned. ·       Seniority top-up for elderly unemployed has been abolished, bar certain exceptions. ·       Eligibility criteria for insertion allowance are tightened (age ceiling for new entrants lowered from 30y to 25y). Allowance for young unemployed below 21 will become conditional on obtaining a high-school or equivalent alternate learning degree.  ·       Reference wage used to calculate unemployment benefits is altered resulting in a slight decrease in the average allowance. ·       Tax reduction on unemployment benefits is not indexed during 2015-19. ·       Fiscal part of the 'workbonus' will be increased in Jan-2016 resulting in higher take home pay for low wage earners. A second increase is planned in 2019. ·       The federal government coalition agreement intends to make unemployment benefits for the long-term unemployed conditional on recipients doing two half days of 'community service'. This is to be implemented through a cooperation agreement with the regions. Limited progress to increase labour market access for disadvantaged groups: ·       The structural reduction in employers' social security contributions (ESSCs) for low-wage earners was increased in Jan-2015 by EUR 14 (to EUR 476.6/quarter) to encourage demand for low-wage labour. Additional increases by the same amount are planned in 2017 and 2019. The wage limit to qualify for these reductions is indexed and increased, extending the target group. ·       Regions: The sixth state reform transferred competence for granting target group specific reductions in ESSC, allowing regions to better align employment incentives with the differing needs of the regional labour markets. ·       FL: simplification of the existing system announced, refocusing incentives on young unemployed, unemployed above the age of 55 and people with disabilities. ·       FL:  reform of subsidised service vouchers for domestic and/or proximity services has been tabled. The requirement that at least 60% of those hired must be on unemployment benefit or welfare recipients would be abolished, increasing the barrier for entry to this labour market circuit for the most disadvantaged. ·       WA: government agreement envisages improving targeted policies aimed at getting young people with low qualifications into the labour market. Some progress towards addressing skills mismatches and early school leaving (see CSR 5 below) Limited progress towards strengthening partnerships between public authorities, public employment services and educational institutions: ·       BXL: Plans to strengthen partnerships between PES and education/training providers and actors. ·       FL: Youth Guarantee Implementation Plan will be updated to better integrate education and employment actions. ·       WA: government agreement envisages conclusion of a 'Pact for employment and training' with the social partners. Entry into force planned for 2016. 
 CSR 5 Restore competitiveness by continuing the reform of the wage-setting system, including wage indexation, in consultation with the social partners and in accordance with national practice, to ensure that wage evolutions reflect productivity developments at sectorial and/or company levels as well as economic circumstances and to provide for effective automatic corrections when needed; by strengthening competition in the retail sectors, removing excessive restrictions in services, including professional services and addressing the risk of further increases of energy distribution costs; by promoting innovation through streamlined incentive schemes and reduced administrative barriers; and by pursuing coordinated education and training policies addressing the pervasive skills mismatches and regional disparities in early school leaving.   || Belgium has made some progress in addressing CSR 5: Some progress in reforming the wage-setting system: ·       Temporary suspension of all wage indexation agreements until inflation has eroded real wages by 2%. ·       Planned reform of the Law of 1996 announced to operationalize the national 'wage norm' to close by 2019 the wage gap vis-à-vis neighbouring countries that has built up since 1996. The wage norm will be set taking into account actual rela­tive wage developments over the past two years. It will be enshrined in a generally binding collec­tive agreement or Royal Decree, and sanctions for exceeding it will be made more automatic. ·       Wage cost reductions already planned have been maintained, though with altered timing: two rounds scheduled for 2015 and 2017 have been combined in 2016; the third round remains planned for 2019. Limited progress towards strengthening competition in the service sector and addressing the problem of distribution costs: ·       Retail: new draft laws for the regions have been presented (WA/FL) or adopted (BXL), but the measures proposed are insufficient to guarantee that conditions for retailers will be simplified and eased in practice.  ·       Professional services: changes have been intro­duced for land surveyors (legal person), patent agent (group representation) and accountants (protected title also for employees). However, these changes have little impact on the restrictions applicable to professional services. In addition, other restrictions (shareholding requirements) were introduced at the same time. ·       Distribution costs: regional regulators adopted tariff methodologies for the period 2015-16. For FL, the new methodology does not solve the issue of the accumulated past costs of the green certificates from 2008-14 when tariffs were frozen. However, it does prevent a rapid build-up of new losses. Some progress in promoting innovation through streamlined incentive schemes and lower administrative barriers: ·       Federal: planned assessment of the need to increase the wage tax exemption for researchers. ·       FL: streamline innovation support and increase effectiveness through merger by early 2016 of the Flemish Agency for Entrepreneurship and the Agency for Innovation by Science and Technology and the integration of the Hercules Foundation (for investment in research infrastructure) within the more encompassing Fund for Scientific Research. ·       WA: Concentration of Marshall Plan on measures with the highest value added, maximising the commercial benefits of research, job creation and export opportunities. Some progress towards addressing skills mismatches and early school leaving: ·       Allowance for young unemployed below 21 will become conditional on obtaining a high-school or equivalent alternate learning degree.  ·       French community: entry into force (Sep-2014) of (1) decrees to prevent early school leaving and improve the coordination of education and youth policies; (2) a reform of lower secondary education encompassing action plans at school and possibly at pupil level to tackle low achievement and support pupils with difficulties. ·       WA: government agreement envisages conclusion of a 'Pact for employment and training' with the social partners. Entry into force planned for: Jan-2016. ·       FL: rollout and update of 2013 'Action plan against early school leaving', combining preventive, interventionist and compensation measures. School-level data on ESL to be made available and use of flexible learning pathways in secondary education to be actively promoted. Qualifying vocational education trajectories are to be further developed through cooperation programmes between the regional PES, the regional agency for entrepreneurial training and specific industry sectors and companies. ·       FL: Additional measures announced to fight early school leaving and skills mismatches: (1) strengthening of work-based learning and its integration into all relevant branches of study, (2) continued actions on STEM, (3) promotion of entrepreneurship and (4) introduction of a new 'dual' system of learning and working. ·       FL: Youth Guarantee Implementation Plan will be updated to better integrate education and employment measures. ·       BXL: Plans to strengthen partnerships between PES and education/training providers and actors in the framework of the regional 'Alliance for jobs and training'. 
 CSR 6 Ensure that the 2020 targets for reducing greenhouse gas emissions from non-ETS activities are met, in particular as regards buildings and transport. Make sure that the contribution of transport is aligned with the objective of reducing road congestion. Agree on a clear distribution of efforts and burdens between the federal and regional entities.   || Belgium has made limited progress in addressing CSR 6: ·       The three regions and the federal government have made no further progress in discussions on how to distribute the effort needed in 2013-20 through an effort-sharing agreement. This should cover the distribution of the non-ETS emissions objective, of the renewable energy objective and of revenues from the auctioning of emission allowances (these are blocked on an account). ·       A mechanism for increasing regional bodies’ awareness of responsibility for climate protection has started in 2015. This involves determining a multiannual reference trajectory on the reduction of GHG emissions in the residential and tertiary building sector for each region. If a region meets (misses) its assigned objective, it receives a financial bonus (penalty) proportional to its distance to the trajectory. The mechanism would be funded by the (blocked) revenues from the auctioning of emission allowances. ·       The intention exists to prepare a specific national system for GHG reduction policies, measures and projections, as already exist for GHG inventories. ·       Important elements of the 'Flemish Climate Policy Plan 2013-2020' are still to be finalised, such as the Flemish Mobility Plan. The Flemish Climate Fund provides a financial framework for additional climate policy, but will draw on the (blocked) auctioning revenues. ·       The Walloon region's first 5-year 'plan air-climat-énergie' presenting concrete measures is still under development (the public consultation ended in Sep-2014). ·       The Brussels region's 'air-climate-energy plan' defining measures and actions is undergoing an environmental impact evaluation before being submitted to public scrutiny. ·       Policy intentions aimed at reducing congestion are contained in the respective government agreements for 2014-19. The adoption of some of these measures at risk, however. The different regions seem to have conflicting intentions on the introduction of road charging for passenger cars. On the other hand, the kilometre charge for heavy vehicles will be introduced in 2016 in all regions. Several other policy intentions still need to be transposed into concrete measures e.g. infrastructure works around Brussels and Antwerp and encouraging a modal shift by investing in inland waterways. 
 Europe 2020 (national targets and progress) 
 Employment rate target set in the 2014 NRP: 73.2%. || The employment rate stood at: ·       67.3% in 2011; ·       67.2% in 2012; ·       67.2% in 2013. In view of past performance the Europe 2020 employment rate target of 73.2% appears ambitious. Achieving it would require creating over 50,000 jobs a year, much more than the average since 2008 and even more than before the 2008 crisis. 
 R&D target set in the 2014 NRP: 3% of GDP (including budgetary costs of federal tax measures in favour of R&D staff, estimated at 0.18% of GDP in 2020 by BE). || Gross domestic expenditure on R&D (in % of GDP): ·       2.15% in 2011; ·       2.24% in 2012; ·       2.28% in 2013. On the basis of recent trends, BE would be within reach of attaining the 2020 target. 
 Greenhouse gas emissions, national target: -15% in 2020 compared to 2005 (in non-ETS sectors). || According to the latest national projections submitted to the Commission and taking into account existing measures, it is expected that the target will be missed: -4% in 2020 compared with 2005 (i.e. projected shortfall of 11 pps.). The change in non-ETS greenhouse gas emissions between 2005 and 2013 was -8%. 
 2020 renewable energy target: 13%. || Share of renewable energy in gross final energy consumption: ·       5.2% in 2011; ·       6.8% in 2012; ·       7.5% in 2013 (provisional, EurObserv'ER). Belgium has made good progress on developing renewables, with 2011/2012 and 2013/2014 interim targets more than met. However, the distance to the target remains considerable. 
 Energy efficiency, 2020 energy consumption targets: ·       43.7Mtoe (primary energy consumption); ·       32.5Mtoe (final energy consumption). || Gross inland consumption of energy: ·       50.0Mtoe in 2011 (final consumption: 36.1Mtoe); ·       46.2Mtoe in 2012 (final consumption: 33.8Mtoe); ·       47.4Mtoe in 2013 (final consumption: 34.8Mtoe). Belgium is not on track to meet its national energy efficiency targets, either for final or for primary energy consumption. 
 Early school leaving (ESL) target: 9.5%. || Young people leaving education and training early (percentage of the population aged 18-24 with at most lower secondary education and not in further education or training): ·       12.3% in 2011; ·       12.0% in 2012; ·       11.0% in 2013. Early school leaving remains below the EU-28 average (11.0% compared with 12.0%) but above the 2020 target of 9.5%. This average masks large disparities between population sub-groups and regions. The rate among young people with a migrant background is twice the overall rate. Rates are significantly higher in WA (14.7%) and BXL (17.7%) than in FL (7.5%). 
 Tertiary education target: 47% || The tertiary educational attainment rate stood at: ·       42.6% in 2011; ·       43.9% in 2012; ·       42.7% in 2013. Belgium's rate significantly exceeds the EU average (36.9% in 2013). The gap to the national target has been widening, however. 
 Target on the reduction of population at risk of poverty or social exclusion in number of persons: 380 000 (as compared to 2010). || The number of people at-risk-of-poverty or social exclusion (x 1 000 persons) stood  at: ·       2 271 in 2011; ·       2 353 in 2012; ·       2 286 in 2013. Even though the increase seen until 2012 has stopped, Belgium is unlikely to achieve the 2020 target. It should be pointed out that some population sub-groups are disproportionately at risk. 
 Table AB.1:     Macroeconomic indicators 
 1 The output gap constitutes the gap between the actual and potential gross domestic product at 2010 market prices.         2 The indicator of domestic demand includes stocks.         3 Unemployed persons are all those who were not employed, had actively sought work and were ready to begin working immediately or within two weeks. The labour force is the total number of people employed and unemployed. The unemployment rate covers the age group 15-74. Source: European Commission 2015 winter forecast; European Commission calculations 
 Table AB.2:     Financial market indicators 
 1) Latest data in November 2014.  2) Latest data Q2 2014.     3) Latest data September 2014.     4) Latest data June 2014. Monetary authorities, monetary and financial institutions are not included.    * Measured in basis points.  Source: IMF (financial soundness indicators); European Commission (long-term interest rates); World Bank (gross external debt); ECB (all other indicators) 
 Table AB.3:     Taxation indicators 
 1 Tax revenues are broken down by economic function, i.e. according to whether taxes are raised on consumption, labour or capital. See European Commission (2014), Taxation trends in the European Union, for a more detailed explanation.      2  This category comprises taxes on energy, transport and pollution and resources included in taxes on consumption and capital.      3  VAT efficiency is measured via the VAT revenue ratio. It is defined as the ratio between the actual VAT revenue collected and the revenue that would be raised if VAT was applied at the standard rate to all final (domestic) consumption expenditures, which is an imperfect measure of the theoretical pure VAT base. A low ratio can indicate a reduction of the tax base due to large exemptions or the application of reduced rates to a wide range of goods and services (‘policy gap’) or a failure to collect all tax due to e.g. fraud (‘collection gap’). It should be noted that the relative scale of cross-border shopping (including trade in financial services) compared to domestic consumption also influences the value of the ratio, notably for smaller economies. For a more detailed discussion, see European Commission (2012), Tax Reforms in EU Member States, and OECD (2014), Consumption tax trends.      Source: European Commission 
 Table AB.4:     Labour market and social indicators 
 1 Unemployed persons are all those who were not employed, but had actively sought work and were ready to begin working immediately or within two weeks. The labour force is the total number of people employed and unemployed.   Data on the unemployment rate of 2014 includes the last release by Eurostat in early February 2015.    2 Long-term unemployed are persons who have been unemployed for at least 12 months.       Source: European Commission (EU Labour Force Survey and European National Accounts) 
 Table AB.5:     Expenditure on social protection benefits (% of GDP) 
 1 People at risk of poverty or social exclusion (AROPE): individuals who are at risk of poverty (AROP) and/or suffering from severe material deprivation (SMD) and/or living in households with zero or very low work intensity (LWI).      2 At-risk-of-poverty rate (AROP): proportion of people with an equivalised disposable income below 60 % of the national equivalised median income.       3 Proportion of people who experience at least four of the following forms of deprivation: not being able to afford to i) pay their rent or utility bills, ii) keep their home adequately warm, iii) face unexpected expenses, iv) eat meat, fish or a protein equivalent every second day, v) enjoy a week of holiday away from home once a year, vi) have a car, vii) have a washing machine, viii) have a colour TV, or ix) have a telephone.      4 People living in households with very low work intensity: proportion of people aged 0-59 living in households where the adults (excluding dependent children) worked less than 20 % of their total work-time potential in the previous 12 months.      5 For EE, CY, MT, SI and SK, thresholds in nominal values in euros; harmonised index of consumer prices (HICP) = 100 in 2006 (2007 survey refers to 2006 incomes)      6 2014 data refer to the average of the first three quarters. Source: For expenditure for social protection benefits ESSPROS; for social inclusion EU-SILC 
 Table AB.6:     Product market performance and policy indicators 
 1Labour productivity is defined as gross value added (in constant prices) divided by the number of persons employed.       2 Patent data refer to applications to the European Patent Office (EPO). They are counted according to the year in which they were filed at the EPO. They are broken down according to the inventor’s place of residence, using fractional counting if multiple inventors or IPC classes are provided to avoid double counting.        3 The methodologies, including the assumptions, for this indicator are presented in detail here: http://www.doingbusiness.org/methodology.        4 Index: 0 = not regulated; 6 = most regulated. The methodologies of the OECD product market regulation indicators are presented in detail here: http://www.oecd.org/competition/reform/indicatorsofproductmarketregulationhomepage.htm       5 Aggregate OECD indicators of regulation in energy, transport and communications (ETCR).       Source: European Commission; World Bank — Doing Business (for enforcing contracts and time to start a business); OECD (for the product market regulation indicators)  
 Table AB.7:     Green growth 
 Country-specific notes: 2013 is not included in the table due to lack of data.        General explanation of the table items:        All macro intensity indicators are expressed as a ratio of a physical quantity to GDP (in 2000 prices)                  Energy intensity: gross inland energy consumption (in kgoe) divided by GDP (in EUR)                  Carbon intensity: Greenhouse gas emissions (in kg CO2 equivalents) divided by GDP (in EUR)                  Resource intensity: Domestic material consumption (in kg) divided by GDP (in EUR)                  Waste intensity: waste (in kg) divided by GDP (in EUR)        Energy balance of trade: the balance of energy exports and imports, expressed as % of GDP          Energy weight in HICP: the proportion of energy items in the consumption basket used for the construction of the HICP        Difference between energy price change and inflation: energy component of HICP vs. total HICP inflation (% change) Environmental taxes over labour or total taxes: from DG TAXUD’s database ‘Taxation trends in the European Union’         Industry energy intensity: final energy consumption of industry (in kgoe) divided by GVA of industry (in 2005 EUR)         Share of energy-intensive industries in the economy: share of gross value added of the energy-intensive industries in GDP         Electricity and gas prices for medium-sized industrial users: consumption band 500–2000MWh and 10000–100000 GJ; figures excl. VAT.        Recycling rate of municipal waste: ratio of recycled municipal waste to total municipal waste        Public R&D for energy or for the environment: government spending on R&D (GBAORD) for these categories as % of GDP        Proportion of GHG emissions covered by ETS: based on greenhouse gas emissions (excl LULUCF) as reported by Member States to the European Environment Agency      Transport energy intensity: final energy consumption of transport activity (kgoe) divided by transport industry gross value added (in 2005 EUR)        Transport carbon intensity: greenhouse gas emissions in transport activity divided by GVA of the transport sector        Energy import dependency: net energy imports divided by gross inland energy consumption incl. consumption of international bunker fuels        Diversification of oil import sources: Herfindahl index, calculated as sum of squared market shares of countries of origin        Diversification of the energy mix: Herfindahl index over natural gas, total petrol products, nuclear heat, renewable energies and solid fuels        Renewable energy share of energy mix: %-share of gross inland energy consumption, expressed in tonne oil equivalents        * European Commission and European Environment Agency        ** For 2007 average of S1 & S2 for DE, HR, LU, NL, FI, SE & UK. Other countries only have S2.        *** For 2007 average of S1 & S2 for HR, IT, NL, FI, SE & UK. Other countries only have S2.        Source: European Commission, unless indicated otherwise 
([1])  Comparability is hampered by the change
in methodology from 2008. However, the trend is also visible for 2008-14.
([2])  The same can be said about so-called wage subsidies, which are
more common in BE than in other Member States. However, the extent to which all
of these subsidies should be factored in to arrive at the most appropriate
gauge of labour cost competitiveness has been the subject of heated debate
between stakeholders (see in this respect In-Depth Review 2014; GECE 2013). The
new federal government has announced its intention to settle the debate on which
wage subsidies are to be considered relevant for calculating the wage gap.
([3])  On the basis of the National Accounts
according to the ESA95 methodology. The new ESA2010 methodology appears to
sketch a more favourable picture, though important data series still need
confirmation.
([4])  Groupe d’experts Compétitivité
et Emploi (GECE), Coût salarial, subventions salariales, productivité du
travail et effort de formation des entreprises, Rapport au Gouvernement, 2013.
([5])  Ibidem; NBB, 2013 Annual report,
2014; Abraham, F., Konings, J., Loonkosten, productiviteit en werkgelegenheid
in een concurrentiële internationale omgeving: een analyse met Belgische
bedrijfsgegevens, 2010.
([6])  Hoge Raad voor de Werkgelegenheid, Advies over het verband tussen
loon en anciënniteit, 2014.
([7])  According to the latest Technical Report
by the Central Economic Council (Dec-2014), the hourly wage cost gap is
estimated to have decreased to 2.9% at the end of 2014. The gap is defined on
the basis of the Law of 1996, i.e. relative to the weighted average of the
three neighbouring countries and with 1996 as base year.
([8])  0.3% of the 0.8% is reserved for forms
of compensation that are not subject to social security contributions.
([9])  The simulations assume a sustained zero wage growth in real terms
once indexation is reactivated. See NBB, Economic
projections for Belgium — Autumn 2014, Economic Review, 2014.
([10]) NBB, Indexering in België: omvang, aard en gevolgen voor de economie
en mogelijke alternatieven, 2012.
([11]) Frontier Economics, International
comparison of electricity and gas prices for commerce and industry, 2011.
([12]) van der Linden, J., De prijs van elektriciteit en aardgas voor
ondernemingen in België, Working Paper 10-14, FPB, 2014; CCERB,
Sociaal-economische nieuwsbrief 199, 2014.
([13]) Gas and electricity prices for most SMEs fall under energy
policies for residential users (see section 3.3). For these users, the
government has decided to continue the specific monitoring of price developments.
This monitoring is based on the 'safety net mechanism' (filet de
sécurité/vangnet) which checks whether commodity component prices for
adjustable contracts are broadly comparable to those in neighbouring countries.
([14]) van der Linden (2014).
([15]) Deloitte, Benchmarking study of
electricity prices between Belgium and neighbouring countries, 2014.
([16]) The simulations in the study compare profiles with yearly
consumption ranging from 100GWh to 1 000GWh, i.e. directly connected to
the high-voltage grid. The numbers referred to are for base load profiles. van
der Linden (2014) comments on the methodology applied, which would result in
higher prices for users in Wallonia with an annual profile up to 200 GWh.
([17]) NBB, 2013 Annual report, 2014.
([18]) At the same time an ageing population
can be expected to result in slower growth of the labour force and the increase
of the ratio between non-active and active persons.
([19]) Also known as the Solow residual. For a
discussion of the European Commission methodology, see D’Auria et al., The
production function methodology for calculating potential growth rates and
output gaps, EC-DG ECFIN, Economic Papers 420, 2010. This methodology is based
on (smoothed) trend calculations of TFP.
([20]) As a result, revenues foregone due to R&D tax incentives are
now about twice the amount of direct public funding of business R&D. 
([21]) empirica, e-skills in Europe, country
report Belgium, study commissioned by European Commission, 2014.
([22]) 6.7% of those aged 25-64 in 2013,
compared with an EA-19 average of 10.4% and more than 17% in FR and NL and 7.8%
in DE.
([23]) Konings, J., Vanormelingen, S., The
impact of training on productivity & wages: firm level evidence, 2014.
([24]) Criscuolo et al., The dynamics of
employment growth: new evidence from 18 countries, OECD Science, Technology and
Industry Policy Papers, No 14, 2014; Geurts, K., Van Biesebroeck, J., Job
creation, firm creation, and de novo entry, K.U.Leuven CES, 2014.
([25]) Kegels, C., Les charges
administratives en Belgique pour l'année 2012, Planning paper 114, Federal
Planning Bureau, 2014.
([26]) The share of outstanding debt which
matures in a given time period or which is subject to changes in interest rates
(because of a floating interest rate). Figures from the Belgian Debt Agency,
'Review 2014 - 2015 Outlook', December 2014.
([27]) These projections start from the
European Commission 2015 winter forecast, with the no-policy change assumption
translated into a structural primary balance kept constant (excluding ageing
costs) at the level of the last year of the forecast (2016). The baseline
scenario is based on the following macro-economic assumptions for the long
term: potential GDP growth remains around 1%; inflation and the change in the
GDP deflator stabilise at 2% in the medium term; long-term interest rates on
new and rolled-over debt converge to 3% in real terms by 2025 and short-term
rates to a value consistent with the long-term interest rate and historical
(pre-crisis) euro area yield curve (see also European Commission, 2012). 
([28]) 2012 Ageing Report. These projections
will be updated in the forthcoming 2015 edition of the Ageing Report, to be
published in the first half of 2015.
([29]) Estimates of the long-term price
elasticity of new housing supply where new supply is measured by residential
investments (OECD, Economic Outlook 2/2010).
([30]) National Bank of Belgium, Financial
Stability Review, 2014. Indexed LTV ratios are calculated as the ratio between
the amount of the mortgage loan outstanding at reporting date (taking
repayments of capital into account) and the assessed market value of the
property.
([31]) However, the cause
of  the increase does not appear to be
lower quality of more recent mortgages. Indeed, the default rates on the
loans completed after
2009 are lower than for those
granted before the crisis. Payment
difficulties faced by consumers today
thus relate to older loans.
([32]) European Systemic Risk Board Report 2014.
([33]) The
debt-to-(financial) asset ratio measures whether the debt incurred can be
repaid by liquidating the available (financial) assets immediately, assuming
that is possible.
([34]) The
debt-to-asset ratio is calculated as the ratio between total debt and total
gross assets for indebted households. The debt-to-income ratio is the ratio of
total debt to gross household income. The debt-service-to-income ratio is
calculated as the ratio between total monthly debt payments and household gross
monthly income. The mortgage debt service-to-income ratio is the ratio of the
monthly mortgage debt payments to gross household income (1/12th of the annual
total), calculated for households with mortgage debt. The loan-to-value ratio
of the main residence is the ratio of the household’s mortgages collateralised
on the household’s main residence to the current reported value of the
household’s main residence, calculated for households having mortgage debt
collateralised on their main residence.
([35]) At the end of 2013, these represented
60% of the outstanding stock. From one year to another, though, the relative
weights of mortgages with fixed or variable interest rates can vary quite
considerably.
([36]) There is a key
conceptual difference in that house prices (in the numerator) are based on new
secondary market transactions and therefore reflect market conditions, while
rents (in the denominator) usually reflect the rent fixed under existing leases
rather than new leases. In addition, as rents in Belgium are subject to various
legal rules restricting increases over time, such as (non‑obligatory)
annual indexation on the basis of the health index, the results obtained
essentially reflect those index movements with smoothing and a certain time
lag. .
([37]) NBB, End of the crisis in the housing
markets? An international survey, 2011.
([38]) A vector error correction model has
been estimated for a panel of 21 EU countries, using a system of five
fundamental variables: the relative house price, total population, real housing
investment, real disposable income per capita and real long-term interest rate.
A country-specific estimate on top of the panel estimates is conducted whenever
the time series allow for a sound econometric analysis, leading to a valuation
gap calculated as a simple average of the individual and the panel estimates.
([39]) OECD Employment Outlook 2013.
([40]) Belgium stands out as the country where
both the structural use of the short time working schemes before the crisis and
its use as an instrument to withstand it has been the most intensive in recent
years. Its use remains high even after the peak of the crisis.
([41]) At the aggregate level, both gross job
creation and gross job destruction rates have fallen to their lowest level
since 2008, resulting in a negative net job creation rate of -0.7% between
Q2-2012 and Q2-2013.
([42]) By measuring the part of the additional
gross wage that is taken away in the form of increased taxes and withdrawn
benefits (including unemployment, family, housing and social assistance
benefits), it provides an indication of the so-called 'unemployment traps' for
various types of stylized households and earning situations, after an
unemployment spell of a given duration.
([43]) CEC, Financiële werkloosheidvallen in België in 2010, CRB 2011 –
0189.
([44]) In principle, spouses are taxed
separately. The marital quotient allows cohabitant or married partners to pool
their earnings, thereby reducing the total amount of income tax due. When one
spouse has no earned income, or own income not exceeding 30% of the total
earned income of the couple, 30% of the total taxable gross income less
flat-rate allowances can be charged to that spouse up to a maximum.
([45]) Vertical skills mismatch means the level of a worker’s skills is
higher or lower than is required by the job. Horizontal skills mismatch means workers
have the appropriate qualification level but possess different skills than those
required for the job they occupy (Cedefop, 2009).
([46]) Zimmer, H., Mismatches op de arbeidsmarkt, Economisch tijdschrift, Sep-2012,
NBB.
([47]) 39.8% vs. 11.3% (DE), 14.9% (NL), 37.6%
(FR) in 2013.
([48]) It is 55.2% (20-64 years) whereas the EU average stands at 63.7%.
Only Spain (54.1%) and Greece (49.5%) register lower rates. 
([49]) European commission, EAC/17/2012 Study
on the effective use of early childhood education and care in preventing early
school leaving, 2014.
([50]) OECD, Talis 2013 results, An
International Perspective on Teaching and learning, chapter 2 
([51]) Fourny, L., 2014-2018:
(Re)motivons les enseignants et les élèves!, Itinera Institute, 2014.
([52]) 17.7% in Brussels, 14.7% in Wallonia,
7.5% in Flanders.
([53]) However, the implicit tax rate on
labour does not take into account wage subsidies, which have been increasingly
used over the past decade and would reduce the implicit tax rate further if
taken into account: by three percentage points over the 2002–09 period, and by
3.2 pps. in 2011  (Valenduc, C., 'Imposition des revenus du travail, du capital
et de la consommation: évolutions récentes', Belgian Ministry of Finance,
Documentatieblad 71/3, 2011).
([54]) Revenues from consumption and
environmental taxes in terms of GDP are slightly below the EU average: revenues
from consumption taxes excluding environmental taxes are equivalent to 8.8% of
GDP in Belgium (EU average: 8.9%) while environmental taxes represent 2.2% of
GDP, against an EU average of 2.4%. VAT and excise duties represent 7.2% and
2.1% of GDP respectively, the latter being the lowest in the EU (EU average: 7.1%
and 2.7%). The broad category of ‘taxes on capital’ gives a mixed picture:
taxes on capital and business income represent 5.9% of GDP (against an EU
average of 5.4%), with a smaller than average share for households’ income from
capital (0.4% GDP against the 0.9% average) while revenues from taxes on the stock
of capital wealth are relatively high in Belgium (4.1% of GDP against an EU
average of 2.8%).
([55]) However, overall revenues from property
taxes in Belgium are among the highest in EU after the UK and France, both in
terms of GDP (3.4% vs. 2.3% in EU) and share of total revenues (7.5% vs. 5.7%
in EU). This is especially due to high revenues from transaction taxes on
immovable property and inheritance and gift taxes (which are all levied at the
regional level). On the other hand, revenues from recurrent taxation on
immovable property amount to 2.9% of total revenues (1.3% of GDP), against an
EU average of 3.8% (1.5% of GDP). Transaction taxes are considered to be
economically more distorting than recurrent property taxes. Hence a tax shift
within immovable property taxation could also be economically beneficial. For
this purpose, the basis for recurrent taxes on immovable property in Belgium
might need to be updated as the currently used cadastral values (estimates of
imputed rent — the net annual revenue generated by renting out a building or
plot of land) often date back to 1975 and have only been updated using
consumption prices since 1990. 
([56]) See for example Eunomia and Aarhus
University, 'Study on environmental fiscal reform potential in 12 EU Member
States', 2014. 
([57]) The annual effective tax advantage
given by a company car in Belgium (EUR 2763) is the highest among the 27 OECD
countries surveyed in Harding, M., 'Personal Tax Treatment of Company Cars and
Commuting Expenses: Estimating the Fiscal and Environmental Costs', OECD
Taxation Working Papers, No. 20, 2014.
([58]) Chambre des Représentants,
‘Inventaire 2013 des exonérations, abattements et réductions qui influencent le
budget de l’Etat’ Annex to the 2015 budget', Doc. 54 0495/006, December 2014.
For a recent review, see Haulotte S., Valenduc C., 'Réduire les dépenses
fiscales : une voie de réforme ?', Reflets et perspectives de la vie économique
Vol. 2014-1, 2014.
([59]) There are four VAT rates. The standard
rate has remained unchanged at 21% since 1996. There are 2 reduced rates (at 6%
and 12%) and a zero rate applying to newspapers and weeklies. In this respect,
see: See Kalyva, A., Princen S., Van Noten, H., ‘The Belgian VAT rate structure
in need of reform’, ECFIN Country Focus Vol.11-13, European Commission, 2014.
([60]) Changes in VAT rates will also have an
impact on inflation and therefore on the evolution of wages through the
generalised practice of automatic indexation of wages to inflation. To offset
the negative impact on competitiveness, accompanying wage cost measures might
be needed.
([61]) The average effective tax rate
following the Devereux-Griffith methodology (measuring the tax burden on the
average investment in a domestic setting) stands at 27% while the marginal
effective tax rate is much lower, even if the effect of the notional interest
deductions is underestimated in the methodology. The average effective tax rate
obtained by analysis of micro-data is around the 30% range and results show a
high dispersion. Results do not significantly differ by size of companies (Conseil
Supérieur des Finances, ‘A tax shift in favour of labour, and broader tax bases
— Scenarios for a global and significant tax reform’, Belgian Ministry of
Finance, 2014).
([62]) According to the Belgian tax code,
corporate tax liability can be reduced by the additional (‘excess’) profit
resulting from the integration into a multinational group instead of
stand-alone companies (for instance through synergies and economies of scale).
Prior confirmation through ex ante ruling is required, however. The European
Commission opened an in-depth inquiry of the system in February 2015.
([63]) See: Zangari, 'Addressing the debt
bias: A comparison between the Belgian and Italian ACE Systems', Taxation Papers
WP No 2014-44, European Commission, 2014.
([64]) See Chambre des représentants et Sénat,
2014, ‘La réforme fiscale: rapport fait au nom de la Commission mixte chargée
de la réforme fiscale’, Doc. 533343/001 (Chambre) et 5-2272/1 (Sénat), February
2014; and Conseil supérieur des Finances, ‘A tax shift in favour of labour, and
broader tax bases — Scenarios for a global and significant tax reform’, Belgian
Ministry of Finance, 2014. The latter contains a detailed discussion and
assessment of the feasibility and effects of several scenarios: a tax shift
towards consumption (VAT, VAT broadening, environmental taxes), a tax shift
towards taxation of savings and capital gains (broadening the personal income
tax base), and possible reforms of corporate income taxation.
([65]) This OECD indicator is often used as a proxy
of countries' regulatory framework. It translates policy action into a
quantitative indicator. Professional services considered are legal, accounting,
architecture and engineering. The 2013 update reflects the situation at the end
of 2012.
([66]) Canton et al., The economic impact of
professional services liberalisation, EC-DG ECFIN, Economic Papers 533, 2014.
([67]) These low 'churn' rates are a general
feature of the BE economy; they also apply to other sectors, indicating that
factors other than market regulation — such as how the labour market functions —
are probably also important.
([68]) van der Linden, J., Consumptieprijzen in België en de buurlanden,
Working Paper 13-12, FPB, 2012.
([69]) Thum-Thysen & Canton (forthcoming).
([70]) SERV, Nieuwe riemen voor het energiebeleid 2014-2019, 2014.
([71]) Under the EU 2020 strategy, BE has committed
to reduce its greenhouse gas emissions from the sectors not covered by the EU Emissions
Trading System (ETS) by 15% below 2005 levels by 2020.
([72]) Nine out of ten employees spend 25%
more time commuting into Brussels than in 2012 according to a recent Agoria
enquiry.
([73]) Christidis, P., Ibáñez Rivas, J.N., Measuring road congestion, JRC technical notes, EC JRC-IPTS, 2012.
([74]) Calculations are derived from the Impact Assessment for the Commission's Integrated Clean Air
Package (2013).
([75]) The following categories are used to
assess progress in implementing the 2014 CSRs: No progress: the Member State
has neither announced nor adopted measures to address the CSR. This category
also applies if the Member State has commissioned a study group to evaluate
possible measures. Limited progress: the Member State has announced some
measures to address the CSR, but these appear insufficient and/or their
adoption/implementation is at risk. Some progress: the Member State has
announced or adopted measures to address the CSR. These are promising, but not
all of them have been implemented and implementation it is not certain that all will be. Substantial progress: the Member State has adopted measures, most
of which have been implemented. They go a long way towards addressing the CSR.
Fully addressed: the Member State has adopted and implemented measures that
address the CSR appropriately.